We Think O-TA Precision Industry (GTSM:8924) Can Manage Its Debt With Ease

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' 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, O-TA Precision Industry Co., Ltd. (GTSM:8924) does carry debt. But the real question is whether this debt is making the company risky.

What Risk Does Debt Bring?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. If things get really bad, the lenders can take control of the business. 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, debt can be an important tool in businesses, particularly capital heavy businesses. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for O-TA Precision Industry

What Is O-TA Precision Industry's Net Debt?

As you can see below, at the end of September 2020, O-TA Precision Industry had NT$430.0m of debt, up from NT$380.0m a year ago. Click the image for more detail. But on the other hand it also has NT$1.43b in cash, leading to a NT$999.4m net cash position.

A Look At O-TA Precision Industry's Liabilities

The latest balance sheet data shows that O-TA Precision Industry had liabilities of NT$1.05b due within a year, and liabilities of NT$206.7m falling due after that. Offsetting this, it had NT$1.43b in cash and NT$762.8m in receivables that were due within 12 months. So it can boast NT$939.4m more liquid assets than total liabilities.

It's good to see that O-TA Precision Industry has plenty of liquidity on its balance sheet, suggesting conservative management of liabilities. Given it has easily adequate short term liquidity, we don't think it will have any issues with its lenders. Succinctly put, O-TA Precision Industry boasts net cash, so it's fair to say it does not have a heavy debt load!

On top of that, O-TA Precision Industry grew its EBIT by 34% over the last twelve months, and that growth will make it easier to handle its debt. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine O-TA Precision Industry's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. O-TA Precision Industry may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. Happily for any shareholders, O-TA Precision Industry actually produced more free cash flow than EBIT over the last three years. That sort of strong cash conversion gets us as excited as the crowd when the beat drops at a Daft Punk concert.

Summing up

While we empathize with investors who find debt concerning, you should keep in mind that O-TA Precision Industry has net cash of NT$999.4m, as well as more liquid assets than liabilities. The cherry on top was that in converted 106% of that EBIT to free cash flow, bringing in NT$356m. When it comes to O-TA Precision Industry's debt, we sufficiently relaxed that our mind turns to the jacuzzi. Above most other metrics, we think its important to track how fast earnings per share is growing, if at all. If you've also come to that realization, you're in luck, because today you can view this interactive graph of O-TA Precision Industry's earnings per share history for free.

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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