Does GFun Industrial (GTSM:4429) 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.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. We can see that GFun Industrial Corporation (GTSM:4429) does use debt in its business. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. 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.

Check out our latest analysis for GFun Industrial

What Is GFun Industrial's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of September 2020 GFun Industrial had NT$100.0m of debt, an increase on NT$20.0m, over one year. But on the other hand it also has NT$148.2m in cash, leading to a NT$48.2m net cash position.

A Look At GFun Industrial's Liabilities

We can see from the most recent balance sheet that GFun Industrial had liabilities of NT$129.5m falling due within a year, and liabilities of NT$97.6m due beyond that. Offsetting these obligations, it had cash of NT$148.2m as well as receivables valued at NT$103.1m due within 12 months. So it can boast NT$24.3m more liquid assets than total liabilities.

This short term liquidity is a sign that GFun Industrial could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, GFun Industrial 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 GFun Industrial 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 GFun Industrial had a loss before interest and tax, and actually shrunk its revenue by 3.0%, to NT$633m. We would much prefer see growth.

So How Risky Is GFun Industrial?

We have no doubt that loss making companies are, in general, riskier than profitable ones. And we do note that GFun Industrial had an earnings before interest and tax (EBIT) loss, over the last year. Indeed, in that time it burnt through NT$66m of cash and made a loss of NT$44m. But at least it has NT$48.2m on the balance sheet to spend on growth, near-term. Even though its balance sheet seems sufficiently liquid, debt always makes us a little nervous if a company doesn't produce free cash flow regularly. 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. Take risks, for example - GFun Industrial has 2 warning signs (and 1 which can't be ignored) we think you should know about.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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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