Is Golden Bridge Electech (TPE:6133) A Risky Investment?

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. As with many other companies Golden Bridge Electech Inc. (TPE:6133) makes use of debt. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for Golden Bridge Electech

What Is Golden Bridge Electech's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of September 2020 Golden Bridge Electech had NT$490.0m of debt, an increase on NT$117.0m, over one year. But on the other hand it also has NT$500.7m in cash, leading to a NT$10.7m net cash position.

How Healthy Is Golden Bridge Electech's Balance Sheet?

According to the last reported balance sheet, Golden Bridge Electech had liabilities of NT$733.9m due within 12 months, and liabilities of NT$13.5m due beyond 12 months. On the other hand, it had cash of NT$500.7m and NT$308.9m worth of receivables due within a year. So it actually has NT$62.3m more liquid assets than total liabilities.

This short term liquidity is a sign that Golden Bridge Electech could probably pay off its debt with ease, as its balance sheet is far from stretched. Simply put, the fact that Golden Bridge Electech has more cash than debt is arguably a good indication that it can manage its debt safely. 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 Golden Bridge Electech will need earnings to service that debt. 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.

In the last year Golden Bridge Electech had a loss before interest and tax, and actually shrunk its revenue by 20%, to NT$951m. That makes us nervous, to say the least.

So How Risky Is Golden Bridge Electech?

Although Golden Bridge Electech had an earnings before interest and tax (EBIT) loss over the last twelve months, it made a statutory profit of NT$2.8m. So taking that on face value, and considering the cash, we don't think its very risky in the near term. We'll feel more comfortable with the stock once EBIT is positive, given the lacklustre revenue growth. 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. For example Golden Bridge Electech has 5 warning signs (and 1 which makes us a bit uncomfortable) we think you should know about.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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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