Hsin Sin Textile (GTSM:4406) Is Carrying A Fair Bit Of Debt

Legendary fund manager Li Lu (who Charlie Munger backed) once said, '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. We can see that Hsin Sin Textile Co., Ltd. (GTSM:4406) does use debt in its business. But is this debt a concern to shareholders?

Why Does Debt Bring Risk?

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. If things get really bad, the lenders can take control of the business. 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 thing to do when considering how much debt a business uses is to look at its cash and debt together.

View our latest analysis for Hsin Sin Textile

How Much Debt Does Hsin Sin Textile Carry?

You can click the graphic below for the historical numbers, but it shows that as of December 2020 Hsin Sin Textile had NT$140.0m of debt, an increase on NT$129.0m, over one year. On the flip side, it has NT$125.3m in cash leading to net debt of about NT$14.7m.

How Healthy Is Hsin Sin Textile's Balance Sheet?

According to the last reported balance sheet, Hsin Sin Textile had liabilities of NT$179.3m due within 12 months, and liabilities of NT$56.0m due beyond 12 months. On the other hand, it had cash of NT$125.3m and NT$59.2m worth of receivables due within a year. So it has liabilities totalling NT$50.7m more than its cash and near-term receivables, combined.

Of course, Hsin Sin Textile has a market capitalization of NT$422.6m, 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. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Hsin Sin Textile will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

In the last year Hsin Sin Textile had a loss before interest and tax, and actually shrunk its revenue by 41%, to NT$369m. To be frank that doesn't bode well.

Caveat Emptor

While Hsin Sin Textile's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. To be specific the EBIT loss came in at NT$38m. 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$9.8m in negative free cash flow over the last twelve months. So suffice it to say we do consider the stock to be risky. 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. For example, we've discovered 2 warning signs for Hsin Sin Textile (1 is a bit concerning!) that you should be aware of before investing here.

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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