Health Check: How Prudently Does InterServ International (GTSM:6169) Use Debt?

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.' 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, InterServ International Inc. (GTSM:6169) does carry debt. But is this debt a concern to shareholders?

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. 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. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for InterServ International

How Much Debt Does InterServ International Carry?

As you can see below, InterServ International had NT$60.0m of debt at September 2020, down from NT$179.9m a year prior. But on the other hand it also has NT$85.6m in cash, leading to a NT$25.6m net cash position.

A Look At InterServ International's Liabilities

According to the last reported balance sheet, InterServ International had liabilities of NT$87.1m due within 12 months, and liabilities of NT$7.14m due beyond 12 months. Offsetting this, it had NT$85.6m in cash and NT$5.94m in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by NT$2.71m.

Having regard to InterServ International's size, it seems that its liquid assets are well balanced with its total liabilities. So it's very unlikely that the NT$720.6m company is short on cash, but still worth keeping an eye on the balance sheet. While it does have liabilities worth noting, InterServ International also has more cash than debt, so we're pretty confident it can manage its debt safely. There's no doubt that we learn most about debt from the balance sheet. But it is InterServ International'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.

In the last year InterServ International had a loss before interest and tax, and actually shrunk its revenue by 47%, to NT$171m. That makes us nervous, to say the least.

So How Risky Is InterServ International?

Although InterServ International had an earnings before interest and tax (EBIT) loss over the last twelve months, it generated positive free cash flow of NT$105m. So although it is loss-making, it doesn't seem to have too much near-term balance sheet risk, keeping in mind the net cash. Until we see some positive EBIT, we're a bit cautious of the stock, not least because of the rather modest revenue growth. 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. Take risks, for example - InterServ International has 2 warning signs we think you should be aware of.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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