Is GFun Industrial (GTSM:4429) Using Debt In A Risky Way?

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.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. As with many other companies GFun Industrial Corporation (GTSM:4429) makes use of debt. But should shareholders be worried about its use of debt?

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. 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. 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. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

See our latest analysis for GFun Industrial

What Is GFun Industrial's Net Debt?

The image below, which you can click on for greater detail, shows that at September 2020 GFun Industrial had debt of NT$100.0m, up from NT$20.0m in one year. However, it does have NT$148.2m in cash offsetting this, leading to net cash of NT$48.2m.

A Look At GFun Industrial's Liabilities

Zooming in on the latest balance sheet data, we can see that GFun Industrial had liabilities of NT$129.5m due within 12 months 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. That's not what we would hope to see.

So How Risky Is GFun Industrial?

By their very nature companies that are losing money are more risky than those with a long history of profitability. And the fact is that over the last twelve months GFun Industrial lost money at the earnings before interest and tax (EBIT) line. Indeed, in that time it burnt through NT$66m of cash and made a loss of NT$44m. However, it has net cash of NT$48.2m, so it has a bit of time before it will need more capital. Overall, its balance sheet doesn't seem overly risky, at the moment, but we're always cautious until we see the positive free cash flow. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. Case in point: We've spotted 2 warning signs for GFun Industrial you should be aware of, and 1 of them is a bit unpleasant.

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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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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