We Think INternational CArbide Technology (GTSM:4754) Is Taking Some Risk With Its Debt

Warren Buffett famously said, '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 INternational CArbide Technology Co., Ltd. (GTSM:4754) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

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. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for INternational CArbide Technology

What Is INternational CArbide Technology's Net Debt?

You can click the graphic below for the historical numbers, but it shows that INternational CArbide Technology had NT$211.4m of debt in December 2020, down from NT$227.8m, one year before. However, it does have NT$164.5m in cash offsetting this, leading to net debt of about NT$46.9m.

A Look At INternational CArbide Technology's Liabilities

Zooming in on the latest balance sheet data, we can see that INternational CArbide Technology had liabilities of NT$137.1m due within 12 months and liabilities of NT$213.6m due beyond that. On the other hand, it had cash of NT$164.5m and NT$78.0m worth of receivables due within a year. So its liabilities total NT$108.3m more than the combination of its cash and short-term receivables.

Of course, INternational CArbide Technology has a market capitalization of NT$923.4m, so these liabilities are probably manageable. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward.

In order to size up a company's debt relative to its earnings, we calculate its net debt divided by its earnings before interest, tax, depreciation, and amortization (EBITDA) and its earnings before interest and tax (EBIT) divided by its interest expense (its interest cover). Thus we consider debt relative to earnings both with and without depreciation and amortization expenses.

INternational CArbide Technology's net debt is only 0.57 times its EBITDA. And its EBIT covers its interest expense a whopping 43.0 times over. So you could argue it is no more threatened by its debt than an elephant is by a mouse. On the other hand, INternational CArbide Technology's EBIT dived 13%, over the last year. We think hat kind of performance, if repeated frequently, could well lead to difficulties for the stock. The balance sheet is clearly the area to focus on when you are analysing debt. But it is INternational CArbide Technology's earnings that will influence how the balance sheet holds up in the future. 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, a company can only pay off debt with cold hard cash, not accounting profits. So it's worth checking how much of that EBIT is backed by free cash flow. During the last three years, INternational CArbide Technology burned a lot of cash. While that may be a result of expenditure for growth, it does make the debt far more risky.

Our View

INternational CArbide Technology's conversion of EBIT to free cash flow and EBIT growth rate definitely weigh on it, in our esteem. But its interest cover tells a very different story, and suggests some resilience. We think that INternational CArbide Technology's debt does make it a bit risky, after considering the aforementioned data points together. Not all risk is bad, as it can boost share price returns if it pays off, but this debt risk is worth keeping in mind. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. These risks can be hard to spot. Every company has them, and we've spotted 3 warning signs for INternational CArbide Technology you should know about.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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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