GEM Terminal IndustryLtd (TWSE:2460) Is Carrying A Fair Bit Of Debt

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.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. We note that GEM Terminal Industry Co.,Ltd. (TWSE:2460) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for GEM Terminal IndustryLtd

What Is GEM Terminal IndustryLtd's Debt?

You can click the graphic below for the historical numbers, but it shows that as of December 2023 GEM Terminal IndustryLtd had NT$2.04b of debt, an increase on NT$1.88b, over one year. However, because it has a cash reserve of NT$1.12b, its net debt is less, at about NT$921.2m.

A Look At GEM Terminal IndustryLtd's Liabilities

The latest balance sheet data shows that GEM Terminal IndustryLtd had liabilities of NT$2.59b due within a year, and liabilities of NT$651.0m falling due after that. Offsetting these obligations, it had cash of NT$1.12b as well as receivables valued at NT$961.6m due within 12 months. So its liabilities total NT$1.16b more than the combination of its cash and short-term receivables.

GEM Terminal IndustryLtd has a market capitalization of NT$5.47b, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. However, it is still worthwhile taking a close look at its ability to pay off debt. When analysing debt levels, the balance sheet is the obvious place to start. 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.

In the last year GEM Terminal IndustryLtd had a loss before interest and tax, and actually shrunk its revenue by 10%, to NT$2.6b. We would much prefer see growth.

Caveat Emptor

Not only did GEM Terminal IndustryLtd's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). Indeed, it lost NT$267m 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. However, it doesn't help that it burned through NT$222m of cash over the last year. So suffice it to say we do consider the stock to be risky. 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 instance, we've identified 1 warning sign for GEM Terminal IndustryLtd that you should be aware of.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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.