Is Airlux Electrical (GTSM:4609) 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.' 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. Importantly, Airlux Electrical Co., Ltd. (GTSM:4609) does carry debt. But the real question is whether this debt is making the company risky.

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 common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. 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 Airlux Electrical

What Is Airlux Electrical's Net Debt?

As you can see below, Airlux Electrical had NT$160.0m of debt, at December 2020, which is about the same as the year before. You can click the chart for greater detail. However, its balance sheet shows it holds NT$303.0m in cash, so it actually has NT$143.0m net cash.

A Look At Airlux Electrical's Liabilities

The latest balance sheet data shows that Airlux Electrical had liabilities of NT$334.1m due within a year, and liabilities of NT$274.7m falling due after that. Offsetting this, it had NT$303.0m in cash and NT$111.3m in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by NT$194.4m.

While this might seem like a lot, it is not so bad since Airlux Electrical has a market capitalization of NT$400.8m, and so it could probably strengthen its balance sheet by raising capital if it needed to. But it's clear that we should definitely closely examine whether it can manage its debt without dilution. Despite its noteworthy liabilities, Airlux Electrical boasts net cash, so it's fair to say it does not have a heavy debt load! There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Airlux Electrical 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 Airlux Electrical had a loss before interest and tax, and actually shrunk its revenue by 35%, to NT$398m. To be frank that doesn't bode well.

So How Risky Is Airlux Electrical?

We have no doubt that loss making companies are, in general, riskier than profitable ones. And the fact is that over the last twelve months Airlux Electrical lost money at the earnings before interest and tax (EBIT) line. And over the same period it saw negative free cash outflow of NT$36m and booked a NT$51m accounting loss. Given it only has net cash of NT$143.0m, the company may need to raise more capital if it doesn't reach break-even soon. Summing up, we're a little skeptical of this one, as it seems fairly risky in the absence of free cashflow. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. To that end, you should learn about the 2 warning signs we've spotted with Airlux Electrical (including 1 which is potentially serious) .

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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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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