Does Great China Metal Ind (TPE:9905) Have A Healthy Balance Sheet?

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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 can see that Great China Metal Ind. Co., Ltd. (TPE:9905) does use debt in its business. But the real question is whether this debt is making the company risky.

When Is Debt A Problem?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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 Great China Metal Ind

What Is Great China Metal Ind's Net Debt?

As you can see below, at the end of December 2020, Great China Metal Ind had NT$101.0m of debt, up from NT$38.6m a year ago. Click the image for more detail. However, its balance sheet shows it holds NT$3.61b in cash, so it actually has NT$3.51b net cash.

How Healthy Is Great China Metal Ind's Balance Sheet?

We can see from the most recent balance sheet that Great China Metal Ind had liabilities of NT$2.21b falling due within a year, and liabilities of NT$476.7m due beyond that. On the other hand, it had cash of NT$3.61b and NT$1.34b worth of receivables due within a year. So it actually has NT$2.27b more liquid assets than total liabilities.

This surplus suggests that Great China Metal Ind is using debt in a way that is appears to be both safe and conservative. Due to its strong net asset position, it is not likely to face issues with its lenders. Succinctly put, Great China Metal Ind boasts net cash, so it's fair to say it does not have a heavy debt load!

Also positive, Great China Metal Ind grew its EBIT by 22% in the last year, and that should make it easier to pay down debt, going forward. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Great China Metal Ind's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. Great China Metal Ind 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. Over the last three years, Great China Metal Ind actually produced more free cash flow than EBIT. That sort of strong cash generation warms our hearts like a puppy in a bumblebee suit.

Summing up

While it is always sensible to investigate a company's debt, in this case Great China Metal Ind has NT$3.51b in net cash and a decent-looking balance sheet. And it impressed us with free cash flow of NT$227m, being 116% of its EBIT. The bottom line is that we do not find Great China Metal Ind's debt levels at all concerning. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. For instance, we've identified 2 warning signs for Great China Metal Ind (1 doesn't sit too well with us) 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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