Here's Why GEM Terminal IndustryLtd (TPE:2460) Can Afford Some Debt

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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. As with many other companies GEM Terminal Industry Co.,Ltd. (TPE:2460) makes use of debt. But is this debt a concern to shareholders?

Why Does Debt Bring Risk?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. If things get really bad, the lenders can take control of the business. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. 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.

See our latest analysis for GEM Terminal IndustryLtd

How Much Debt Does GEM Terminal IndustryLtd Carry?

As you can see below, GEM Terminal IndustryLtd had NT$2.07b of debt at September 2020, down from NT$2.40b a year prior. However, it does have NT$1.30b in cash offsetting this, leading to net debt of about NT$761.8m.

How Strong Is GEM Terminal IndustryLtd's Balance Sheet?

According to the last reported balance sheet, GEM Terminal IndustryLtd had liabilities of NT$2.26b due within 12 months, and liabilities of NT$775.4m due beyond 12 months. On the other hand, it had cash of NT$1.30b and NT$1.17b worth of receivables due within a year. So its liabilities total NT$558.1m more than the combination of its cash and short-term receivables.

Given GEM Terminal IndustryLtd has a market capitalization of NT$4.95b, it's hard to believe these liabilities pose much threat. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. The balance sheet is clearly the area to focus on when you are analysing debt. But it is GEM Terminal IndustryLtd's earnings that will influence how the balance sheet holds up in the future. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

Over 12 months, GEM Terminal IndustryLtd made a loss at the EBIT level, and saw its revenue drop to NT$3.3b, which is a fall of 7.4%. We would much prefer see growth.

Caveat Emptor

Over the last twelve months GEM Terminal IndustryLtd produced an earnings before interest and tax (EBIT) loss. Indeed, it lost NT$37m at the EBIT level. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. So we think its balance sheet is a little strained, though not beyond repair. For example, we would not want to see a repeat of last year's loss of NT$195m. In the meantime, we consider the stock very risky. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. Case in point: We've spotted 2 warning signs for GEM Terminal IndustryLtd you should be aware of, and 1 of them is a bit unpleasant.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

When trading GEM Terminal IndustryLtd or any other investment, use the platform considered by many to be the Professional's Gateway to the Worlds Market, Interactive Brokers. You get the lowest-cost* trading on stocks, options, futures, forex, bonds and funds worldwide from a single integrated account. Promoted

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.
^*Interactive Brokers Rated Lowest Cost Broker by StockBrokers.com Annual Online Review 2020

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.