Xxentria Technology Materials (GTSM:8942) Has A Pretty Healthy Balance Sheet

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. We note that Xxentria Technology Materials Co., Ltd. (GTSM:8942) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. If things get really bad, the lenders can take control of the business. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

Check out our latest analysis for Xxentria Technology Materials

What Is Xxentria Technology Materials's Debt?

You can click the graphic below for the historical numbers, but it shows that as of September 2020 Xxentria Technology Materials had NT$2.56b of debt, an increase on NT$1.79b, over one year. But it also has NT$3.16b in cash to offset that, meaning it has NT$602.2m net cash.

How Strong Is Xxentria Technology Materials' Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Xxentria Technology Materials had liabilities of NT$2.81b due within 12 months and liabilities of NT$424.0m due beyond that. Offsetting this, it had NT$3.16b in cash and NT$654.7m in receivables that were due within 12 months. So it can boast NT$583.8m more liquid assets than total liabilities.

This short term liquidity is a sign that Xxentria Technology Materials could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, Xxentria Technology Materials boasts net cash, so it's fair to say it does not have a heavy debt load!

In fact Xxentria Technology Materials's saving grace is its low debt levels, because its EBIT has tanked 62% in the last twelve months. Falling earnings (if the trend continues) could eventually make even modest debt quite risky. The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since Xxentria Technology Materials will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. While Xxentria Technology Materials has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. Happily for any shareholders, Xxentria Technology Materials actually produced more free cash flow than EBIT over the last three years. That sort of strong cash conversion gets us as excited as the crowd when the beat drops at a Daft Punk concert.

Summing up

While we empathize with investors who find debt concerning, you should keep in mind that Xxentria Technology Materials has net cash of NT$602.2m, as well as more liquid assets than liabilities. And it impressed us with free cash flow of NT$225m, being 118% of its EBIT. So we don't have any problem with Xxentria Technology Materials's use of debt. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. To that end, you should learn about the 2 warning signs we've spotted with Xxentria Technology Materials (including 1 which is potentially serious) .

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.
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