We Think Cherng Tay Technology (GTSM:4767) Can Manage Its Debt With Ease

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 can see that Cherng Tay Technology Co., Ltd. (GTSM:4767) does use debt in its business. But is this debt a concern to shareholders?

When Is Debt Dangerous?

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. 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. 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 Cherng Tay Technology

What Is Cherng Tay Technology's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of September 2020 Cherng Tay Technology had NT$185.5m of debt, an increase on NT$155.1m, over one year. But it also has NT$425.0m in cash to offset that, meaning it has NT$239.5m net cash.

A Look At Cherng Tay Technology's Liabilities

Zooming in on the latest balance sheet data, we can see that Cherng Tay Technology had liabilities of NT$287.1m due within 12 months and liabilities of NT$272.7m due beyond that. On the other hand, it had cash of NT$425.0m and NT$290.3m worth of receivables due within a year. So it can boast NT$155.5m more liquid assets than total liabilities.

It's good to see that Cherng Tay Technology has plenty of liquidity on its balance sheet, suggesting conservative management of liabilities. Due to its strong net asset position, it is not likely to face issues with its lenders. Simply put, the fact that Cherng Tay Technology has more cash than debt is arguably a good indication that it can manage its debt safely.

On top of that, Cherng Tay Technology grew its EBIT by 54% over the last twelve months, and that growth will make it easier to handle its debt. 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 Cherng Tay Technology 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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. While Cherng Tay Technology has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. In the last three years, Cherng Tay Technology's free cash flow amounted to 36% of its EBIT, less than we'd expect. That's not great, when it comes to paying down debt.

Summing up

While it is always sensible to investigate a company's debt, in this case Cherng Tay Technology has NT$239.5m in net cash and a decent-looking balance sheet. And it impressed us with its EBIT growth of 54% over the last year. So is Cherng Tay Technology's debt a risk? It doesn't seem so to us. 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. To that end, you should be aware of the 2 warning signs we've spotted with Cherng Tay Technology .

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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