Is G-SHANK Enterprise (TPE:2476) Using Too Much Debt?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. We can see that G-SHANK Enterprise Co., Ltd. (TPE:2476) does use debt in its business. But the more important question is: how much risk is that debt creating?

What Risk Does Debt Bring?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for G-SHANK Enterprise

What Is G-SHANK Enterprise's Debt?

As you can see below, at the end of September 2020, G-SHANK Enterprise had NT$1.38b of debt, up from NT$1.04b a year ago. Click the image for more detail. But it also has NT$4.26b in cash to offset that, meaning it has NT$2.88b net cash.

A Look At G-SHANK Enterprise's Liabilities

We can see from the most recent balance sheet that G-SHANK Enterprise had liabilities of NT$2.16b falling due within a year, and liabilities of NT$736.6m due beyond that. Offsetting these obligations, it had cash of NT$4.26b as well as receivables valued at NT$1.12b due within 12 months. So it actually has NT$2.49b more liquid assets than total liabilities.

This excess liquidity is a great indication that G-SHANK Enterprise's balance sheet is almost as strong as Fort Knox. Having regard to this fact, we think its balance sheet is as strong as an ox. Simply put, the fact that G-SHANK Enterprise has more cash than debt is arguably a good indication that it can manage its debt safely.

Fortunately, G-SHANK Enterprise grew its EBIT by 4.6% in the last year, making that debt load look even more manageable. There's no doubt that we learn most about debt from the balance sheet. But it is G-SHANK Enterprise'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.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. G-SHANK Enterprise may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. During the last three years, G-SHANK Enterprise generated free cash flow amounting to a very robust 84% of its EBIT, more than we'd expect. That positions it well to pay down debt if desirable to do so.

Summing up

While we empathize with investors who find debt concerning, you should keep in mind that G-SHANK Enterprise has net cash of NT$2.88b, as well as more liquid assets than liabilities. And it impressed us with free cash flow of NT$313m, being 84% of its EBIT. When it comes to G-SHANK Enterprise's debt, we sufficiently relaxed that our mind turns to the jacuzzi. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. For example, we've discovered 4 warning signs for G-SHANK Enterprise (1 shouldn't be ignored!) that you should be aware of before investing here.

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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