Does GlobalSat WorldCom (GTSM:3499) Have A Healthy Balance Sheet?

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.' 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 GlobalSat WorldCom Corporation (GTSM:3499) makes use of debt. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. 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 GlobalSat WorldCom

What Is GlobalSat WorldCom's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of September 2020 GlobalSat WorldCom had NT$422.8m of debt, an increase on NT$397.8m, over one year. However, it does have NT$568.3m in cash offsetting this, leading to net cash of NT$145.6m.

A Look At GlobalSat WorldCom's Liabilities

Zooming in on the latest balance sheet data, we can see that GlobalSat WorldCom had liabilities of NT$579.3m due within 12 months and liabilities of NT$35.5m due beyond that. On the other hand, it had cash of NT$568.3m and NT$49.6m worth of receivables due within a year. So these liquid assets roughly match the total liabilities.

This state of affairs indicates that GlobalSat WorldCom's balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So while it's hard to imagine that the NT$577.2m company is struggling for cash, we still think it's worth monitoring its balance sheet. Simply put, the fact that GlobalSat WorldCom 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 it is GlobalSat WorldCom'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.

Over 12 months, GlobalSat WorldCom made a loss at the EBIT level, and saw its revenue drop to NT$439m, which is a fall of 42%. That makes us nervous, to say the least.

So How Risky Is GlobalSat WorldCom?

While GlobalSat WorldCom lost money on an earnings before interest and tax (EBIT) level, it actually generated positive free cash flow NT$67m. So although it is loss-making, it doesn't seem to have too much near-term balance sheet risk, keeping in mind the net cash. With mediocre revenue growth in the last year, we're don't find the investment opportunity particularly compelling. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. Be aware that GlobalSat WorldCom is showing 3 warning signs in our investment analysis , and 1 of those is concerning...

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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