Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' 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. We note that GlobalSat WorldCom Corporation (GTSM:3499) does have debt on its balance sheet. But should shareholders be worried about its use of debt?
What Risk Does Debt Bring?
Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own 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. The first step when considering a company's debt levels is to consider its cash and debt together.
What Is GlobalSat WorldCom's 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$500.0m in cash offsetting this, leading to net cash of NT$77.2m.
How Healthy Is GlobalSat WorldCom's Balance Sheet?
According to the last reported balance sheet, GlobalSat WorldCom had liabilities of NT$579.3m due within 12 months, and liabilities of NT$35.5m due beyond 12 months. On the other hand, it had cash of NT$500.0m and NT$49.6m worth of receivables due within a year. So its liabilities total NT$65.3m more than the combination of its cash and short-term receivables.
Of course, GlobalSat WorldCom has a market capitalization of NT$634.9m, so these liabilities are probably manageable. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. While it does have liabilities worth noting, GlobalSat WorldCom also has more cash than debt, so we're pretty confident it can manage its debt safely. There's no doubt that we learn most about debt from the balance sheet. 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.
In the last year GlobalSat WorldCom had a loss before interest and tax, and actually shrunk its revenue by 42%, to NT$439m. That makes us nervous, to say the least.
So How Risky Is GlobalSat WorldCom?
Although GlobalSat WorldCom had an earnings before interest and tax (EBIT) loss over the last twelve months, it generated positive free cash flow of NT$67m. So taking that on face value, and considering the net cash situation, we don't think that the stock is too risky in the near term. Until we see some positive EBIT, we're a bit cautious of the stock, not least because of the rather modest revenue growth. 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. We've identified 3 warning signs with GlobalSat WorldCom (at least 1 which is a bit unpleasant) , and understanding them should be part of your investment process.
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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