We Think Daily Polymer (GTSM:4716) Can Manage Its Debt With Ease

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. We note that Daily Polymer Corp. (GTSM:4716) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

What Risk Does Debt Bring?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. If things get really bad, the lenders can take control of the business. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth 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.

View our latest analysis for Daily Polymer

What Is Daily Polymer's Debt?

As you can see below, at the end of September 2020, Daily Polymer had NT$514.5m of debt, up from NT$342.3m a year ago. Click the image for more detail. But it also has NT$543.0m in cash to offset that, meaning it has NT$28.6m net cash.

How Strong Is Daily Polymer's Balance Sheet?

The latest balance sheet data shows that Daily Polymer had liabilities of NT$511.7m due within a year, and liabilities of NT$261.4m falling due after that. Offsetting this, it had NT$543.0m in cash and NT$306.6m in receivables that were due within 12 months. So it can boast NT$76.6m more liquid assets than total liabilities.

This surplus suggests that Daily Polymer has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Simply put, the fact that Daily Polymer has more cash than debt is arguably a good indication that it can manage its debt safely.

Even more impressive was the fact that Daily Polymer grew its EBIT by 154% over twelve months. If maintained that growth will make the debt even more manageable in the years ahead. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Daily Polymer 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.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. Daily Polymer 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, Daily Polymer 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 Daily Polymer has net cash of NT$28.6m, as well as more liquid assets than liabilities. The cherry on top was that in converted 140% of that EBIT to free cash flow, bringing in NT$102m. So is Daily Polymer's debt a risk? It doesn't seem so to us. 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. For example, we've discovered 4 warning signs for Daily Polymer (1 is significant!) that you should be aware of before investing here.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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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