Would Fu Ta Material Technology (GTSM:4402) Be Better Off With Less 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.' 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 Fu Ta Material Technology Co., Ltd. (GTSM:4402) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. If things get really bad, the lenders can take control of the business. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. 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. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for Fu Ta Material Technology

How Much Debt Does Fu Ta Material Technology Carry?

The chart below, which you can click on for greater detail, shows that Fu Ta Material Technology had NT$184.7m in debt in December 2020; about the same as the year before. On the flip side, it has NT$16.1m in cash leading to net debt of about NT$168.6m.

How Strong Is Fu Ta Material Technology's Balance Sheet?

We can see from the most recent balance sheet that Fu Ta Material Technology had liabilities of NT$211.7m falling due within a year, and liabilities of NT$37.8m due beyond that. On the other hand, it had cash of NT$16.1m and NT$24.9m worth of receivables due within a year. So its liabilities total NT$208.6m more than the combination of its cash and short-term receivables.

This is a mountain of leverage relative to its market capitalization of NT$333.4m. This suggests shareholders would be heavily diluted if the company needed to shore up its balance sheet in a hurry. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Fu Ta Material Technology 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.

Over 12 months, Fu Ta Material Technology made a loss at the EBIT level, and saw its revenue drop to NT$120m, which is a fall of 28%. To be frank that doesn't bode well.

Caveat Emptor

While Fu Ta Material Technology's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. Indeed, it lost a very considerable NT$38m at the EBIT level. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. Another cause for caution is that is bled NT$68m 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. Be aware that Fu Ta Material Technology is showing 4 warning signs in our investment analysis , and 1 of those makes us a bit uncomfortable...

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. 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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