Does Hakers Enterprise (GTSM:4432) 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 note that Hakers Enterprise Co., Ltd. (GTSM:4432) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

When Is Debt A Problem?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

Check out our latest analysis for Hakers Enterprise

How Much Debt Does Hakers Enterprise Carry?

You can click the graphic below for the historical numbers, but it shows that as of September 2020 Hakers Enterprise had NT$50.0m of debt, an increase on none, over one year. However, it does have NT$495.1m in cash offsetting this, leading to net cash of NT$445.1m.

How Strong Is Hakers Enterprise's Balance Sheet?

The latest balance sheet data shows that Hakers Enterprise had liabilities of NT$292.5m due within a year, and liabilities of NT$45.9m falling due after that. On the other hand, it had cash of NT$495.1m and NT$292.3m worth of receivables due within a year. So it can boast NT$448.9m more liquid assets than total liabilities.

This luscious liquidity implies that Hakers Enterprise's balance sheet is sturdy like a giant sequoia tree. Having regard to this fact, we think its balance sheet is just as strong as misogynists are weak. Succinctly put, Hakers Enterprise 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 it is Hakers Enterprise's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Over 12 months, Hakers Enterprise made a loss at the EBIT level, and saw its revenue drop to NT$1.7b, which is a fall of 6.4%. That's not what we would hope to see.

So How Risky Is Hakers Enterprise?

While Hakers Enterprise lost money on an earnings before interest and tax (EBIT) level, it actually generated positive free cash flow NT$97m. So taking that on face value, and considering the net cash situation, we don't think that the stock is too risky in the near term. There's no doubt the next few years will be crucial to how the business matures. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. Consider for instance, the ever-present spectre of investment risk. We've identified 2 warning signs with Hakers Enterprise (at least 1 which is a bit concerning) , and understanding them should be part of your investment process.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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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