Sung GangLimited (GTSM:6240) Has Debt But No Earnings; Should You Worry?

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' 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, Sung Gang Corp.Limited (GTSM:6240) does carry debt. But is this debt a concern to shareholders?

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. 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, 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.

Check out our latest analysis for Sung GangLimited

What Is Sung GangLimited's Net Debt?

As you can see below, Sung GangLimited had NT$77.0m of debt at September 2020, down from NT$81.3m a year prior. However, it does have NT$318.0m in cash offsetting this, leading to net cash of NT$240.9m.

A Look At Sung GangLimited's Liabilities

According to the last reported balance sheet, Sung GangLimited had liabilities of NT$416.3m due within 12 months, and liabilities of NT$295.3m due beyond 12 months. Offsetting these obligations, it had cash of NT$318.0m as well as receivables valued at NT$17.7m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by NT$375.9m.

Given this deficit is actually higher than the company's market capitalization of NT$331.6m, we think shareholders really should watch Sung GangLimited's debt levels, like a parent watching their child ride a bike for the first time. Hypothetically, extremely heavy dilution would be required if the company were forced to pay down its liabilities by raising capital at the current share price. Given that Sung GangLimited has more cash than debt, we're pretty confident it can handle its debt, despite the fact that it has a lot of liabilities in total. When analysing debt levels, the balance sheet is the obvious place to start. But it is Sung GangLimited'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.

In the last year Sung GangLimited had a loss before interest and tax, and actually shrunk its revenue by 44%, to NT$16m. To be frank that doesn't bode well.

So How Risky Is Sung GangLimited?

By their very nature companies that are losing money are more risky than those with a long history of profitability. And we do note that Sung GangLimited had an earnings before interest and tax (EBIT) loss, over the last year. Indeed, in that time it burnt through NT$10m of cash and made a loss of NT$54m. With only NT$240.9m on the balance sheet, it would appear that its going to need to raise capital again soon. Summing up, we're a little skeptical of this one, as it seems fairly risky in the absence of free cashflow. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. Consider for instance, the ever-present spectre of investment risk. We've identified 3 warning signs with Sung GangLimited (at least 2 which are significant) , and understanding them should be part of your investment process.

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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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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