Is Hsin Sin Textile (GTSM:4406) Weighed On By Its Debt Load?

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.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. Importantly, Hsin Sin Textile Co., Ltd. (GTSM:4406) does carry debt. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

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. 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.

Check out our latest analysis for Hsin Sin Textile

What Is Hsin Sin Textile's Net Debt?

You can click the graphic below for the historical numbers, but it shows that Hsin Sin Textile had NT$116.0m of debt in September 2020, down from NT$123.0m, one year before. But it also has NT$136.1m in cash to offset that, meaning it has NT$20.1m net cash.

A Look At Hsin Sin Textile's Liabilities

Zooming in on the latest balance sheet data, we can see that Hsin Sin Textile had liabilities of NT$138.7m due within 12 months and liabilities of NT$58.2m due beyond that. Offsetting these obligations, it had cash of NT$136.1m as well as receivables valued at NT$52.6m due within 12 months. So its liabilities total NT$8.21m more than the combination of its cash and short-term receivables.

Of course, Hsin Sin Textile has a market capitalization of NT$402.3m, so these liabilities are probably manageable. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. Despite its noteworthy liabilities, Hsin Sin Textile boasts net cash, so it's fair to say it does not have a heavy debt load! 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 if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

In the last year Hsin Sin Textile had a loss before interest and tax, and actually shrunk its revenue by 36%, to NT$429m. That makes us nervous, to say the least.

So How Risky Is Hsin Sin Textile?

Although Hsin Sin Textile had an earnings before interest and tax (EBIT) loss over the last twelve months, it generated positive free cash flow of NT$15m. 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. Until we see some positive EBIT, we're a bit cautious of the stock, not least because of the rather modest revenue growth. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. Take risks, for example - Hsin Sin Textile has 2 warning signs (and 1 which is concerning) we think you should know about.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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