Would GEM Terminal IndustryLtd (TWSE:2460) Be Better Off With Less Debt?

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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 can see that GEM Terminal Industry Co.,Ltd. (TWSE:2460) does use debt in its business. But is this debt a concern to shareholders?

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. 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. 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 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 GEM Terminal IndustryLtd

How Much Debt Does GEM Terminal IndustryLtd Carry?

As you can see below, at the end of June 2024, GEM Terminal IndustryLtd had NT$2.42b of debt, up from NT$1.56b a year ago. Click the image for more detail. However, because it has a cash reserve of NT$1.13b, its net debt is less, at about NT$1.29b.

A Look At GEM Terminal IndustryLtd's Liabilities

We can see from the most recent balance sheet that GEM Terminal IndustryLtd had liabilities of NT$2.61b falling due within a year, and liabilities of NT$828.5m due beyond that. On the other hand, it had cash of NT$1.13b and NT$1.10b worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by NT$1.21b.

While this might seem like a lot, it is not so bad since GEM Terminal IndustryLtd has a market capitalization of NT$4.86b, and so it could probably strengthen its balance sheet by raising capital if it needed to. But it's clear that we should definitely closely examine whether it can manage its debt without dilution. There's no doubt that we learn most about debt from the balance sheet. But it is GEM Terminal IndustryLtd's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

In the last year GEM Terminal IndustryLtd wasn't profitable at an EBIT level, but managed to grow its revenue by 25%, to NT$3.0b. Shareholders probably have their fingers crossed that it can grow its way to profits.

Caveat Emptor

While we can certainly appreciate GEM Terminal IndustryLtd's revenue growth, its earnings before interest and tax (EBIT) loss is not ideal. To be specific the EBIT loss came in at NT$176m. 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. Another cause for caution is that is bled NT$727m in negative free cash flow over the last twelve months. So in short it's a really risky stock. 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. For example, we've discovered 2 warning signs for GEM Terminal IndustryLtd that you should be aware of before investing here.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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.