We Think Allied Industrial (GTSM:4702) Has A Fair Chunk Of Debt

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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 Allied Industrial Corp., Ltd. (GTSM:4702) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

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 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for Allied Industrial

What Is Allied Industrial's Net Debt?

As you can see below, at the end of September 2020, Allied Industrial had NT$295.0m of debt, up from NT$212.9m a year ago. Click the image for more detail. However, it does have NT$86.9m in cash offsetting this, leading to net debt of about NT$208.1m.

How Healthy Is Allied Industrial's Balance Sheet?

According to the last reported balance sheet, Allied Industrial had liabilities of NT$222.9m due within 12 months, and liabilities of NT$161.3m due beyond 12 months. On the other hand, it had cash of NT$86.9m and NT$125.6m worth of receivables due within a year. So its liabilities total NT$171.7m more than the combination of its cash and short-term receivables.

While this might seem like a lot, it is not so bad since Allied Industrial has a market capitalization of NT$801.5m, 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. The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since Allied 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 Allied Industrial wasn't profitable at an EBIT level, but managed to grow its revenue by 30%, to NT$1.1b. With any luck the company will be able to grow its way to profitability.

Caveat Emptor

While we can certainly appreciate Allied Industrial's revenue growth, its earnings before interest and tax (EBIT) loss is not ideal. Indeed, it lost NT$24m at the EBIT level. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. Another cause for caution is that is bled NT$138m in negative free cash flow over the last twelve months. So in short it's a really risky stock. 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. To that end, you should be aware of the 1 warning sign we've spotted with Allied Industrial .

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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