Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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, Green River Holding Co. Ltd. (GTSM:8444) does carry debt. But should shareholders be worried about its use of debt?
When Is Debt A Problem?
Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. The first step when considering a company's debt levels is to consider its cash and debt together.
View our latest analysis for Green River Holding
What Is Green River Holding's Net Debt?
As you can see below, at the end of September 2020, Green River Holding had NT$5.87b of debt, up from NT$5.62b a year ago. Click the image for more detail. However, it also had NT$433.0m in cash, and so its net debt is NT$5.44b.
How Healthy Is Green River Holding's Balance Sheet?
The latest balance sheet data shows that Green River Holding had liabilities of NT$1.64b due within a year, and liabilities of NT$4.84b falling due after that. On the other hand, it had cash of NT$433.0m and NT$252.3m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by NT$5.80b.
Given this deficit is actually higher than the company's market capitalization of NT$5.60b, we think shareholders really should watch Green River Holding's debt levels, like a parent watching their child ride a bike for the first time. In the scenario where the company had to clean up its balance sheet quickly, it seems likely shareholders would suffer extensive dilution. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Green River Holding 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 Green River Holding wasn't profitable at an EBIT level, but managed to grow its revenue by 2.9%, to NT$2.9b. That rate of growth is a bit slow for our taste, but it takes all types to make a world.
Caveat Emptor
Over the last twelve months Green River Holding produced an earnings before interest and tax (EBIT) loss. Indeed, it lost NT$161m at the EBIT level. Considering that alongside the liabilities mentioned above make us nervous about the company. It would need to improve its operations quickly for us to be interested in it. Not least because it had negative free cash flow of NT$817m over the last twelve months. That means it's on the risky side of things. 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 - Green River Holding has 2 warning signs we think you should be aware of.
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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About TPEX:8444
Green River Holding
Manufactures, processes, and sells particle boards, solid wood boards, and resins in Thailand.
Slightly overvalued very low.
