We Think HIM International Music (GTSM:8446) Can Manage Its Debt With Ease

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. As with many other companies HIM International Music Inc. (GTSM:8446) makes use of debt. 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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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, plenty of companies use debt to fund growth, without any negative consequences. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for HIM International Music

What Is HIM International Music's Net Debt?

The image below, which you can click on for greater detail, shows that at September 2020 HIM International Music had debt of NT$951.5m, up from NT$437.3m in one year. However, its balance sheet shows it holds NT$1.15b in cash, so it actually has NT$200.2m net cash.

How Healthy Is HIM International Music's Balance Sheet?

We can see from the most recent balance sheet that HIM International Music had liabilities of NT$1.43b falling due within a year, and liabilities of NT$211.3m due beyond that. Offsetting these obligations, it had cash of NT$1.15b as well as receivables valued at NT$91.7m due within 12 months. So its liabilities total NT$399.2m more than the combination of its cash and short-term receivables.

Since publicly traded HIM International Music shares are worth a total of NT$5.34b, it seems unlikely that this level of liabilities would be a major threat. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. While it does have liabilities worth noting, HIM International Music also has more cash than debt, so we're pretty confident it can manage its debt safely.

Fortunately, HIM International Music grew its EBIT by 2.3% in the last year, making that debt load look even more manageable. The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine HIM International Music's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While HIM International Music 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. Over the last three years, HIM International Music recorded free cash flow worth a fulsome 100% of its EBIT, which is stronger than we'd usually expect. That positions it well to pay down debt if desirable to do so.

Summing up

While it is always sensible to look at a company's total liabilities, it is very reassuring that HIM International Music has NT$200.2m in net cash. And it impressed us with free cash flow of NT$402m, being 100% of its EBIT. So we don't think HIM International Music's use of debt is risky. 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. For instance, we've identified 2 warning signs for HIM International Music that you should be aware of.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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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