These 4 Measures Indicate That Lifestyle Global Enterprise (GTSM:8066) Is Using Debt Reasonably Well

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. Importantly, Lifestyle Global Enterprise Inc. (GTSM:8066) does carry debt. But should shareholders be worried about its use of debt?

When Is Debt Dangerous?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. 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, 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. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for Lifestyle Global Enterprise

What Is Lifestyle Global Enterprise's Net Debt?

The image below, which you can click on for greater detail, shows that at December 2020 Lifestyle Global Enterprise had debt of NT$629.6m, up from NT$347.1m in one year. But it also has NT$711.7m in cash to offset that, meaning it has NT$82.1m net cash.

How Healthy Is Lifestyle Global Enterprise's Balance Sheet?

According to the last reported balance sheet, Lifestyle Global Enterprise had liabilities of NT$1.06b due within 12 months, and liabilities of NT$396.7m due beyond 12 months. Offsetting this, it had NT$711.7m in cash and NT$1.15b in receivables that were due within 12 months. So it actually has NT$407.9m more liquid assets than total liabilities.

This excess liquidity suggests that Lifestyle Global Enterprise is taking a careful approach to debt. Due to its strong net asset position, it is not likely to face issues with its lenders. Simply put, the fact that Lifestyle Global Enterprise has more cash than debt is arguably a good indication that it can manage its debt safely.

In fact Lifestyle Global Enterprise's saving grace is its low debt levels, because its EBIT has tanked 31% in the last twelve months. When a company sees its earnings tank, it can sometimes find its relationships with its lenders turn sour. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Lifestyle Global Enterprise will need earnings to service that debt. 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.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. Lifestyle Global Enterprise 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. During the last three years, Lifestyle Global Enterprise produced sturdy free cash flow equating to 69% of its EBIT, about what we'd expect. This free cash flow puts the company in a good position to pay down debt, when appropriate.

Summing up

While we empathize with investors who find debt concerning, you should keep in mind that Lifestyle Global Enterprise has net cash of NT$82.1m, as well as more liquid assets than liabilities. The cherry on top was that in converted 69% of that EBIT to free cash flow, bringing in NT$210m. So we are not troubled with Lifestyle Global Enterprise's debt use. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. These risks can be hard to spot. Every company has them, and we've spotted 5 warning signs for Lifestyle Global Enterprise (of which 1 is a bit unpleasant!) you should know about.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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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