Does Grand Process Technology (GTSM:3131) 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.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. We can see that Grand Process Technology Corporation (GTSM:3131) does use debt in its business. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

Debt assists a business until the business has trouble paying it off, either with new capital or with free 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. 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.

See our latest analysis for Grand Process Technology

What Is Grand Process Technology's Net Debt?

You can click the graphic below for the historical numbers, but it shows that Grand Process Technology had NT$626.6m of debt in September 2020, down from NT$673.8m, one year before. But it also has NT$1.32b in cash to offset that, meaning it has NT$696.1m net cash.

How Strong Is Grand Process Technology's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Grand Process Technology had liabilities of NT$1.88b due within 12 months and liabilities of NT$400.9m due beyond that. On the other hand, it had cash of NT$1.32b and NT$448.8m worth of receivables due within a year. So it has liabilities totalling NT$506.8m more than its cash and near-term receivables, combined.

Of course, Grand Process Technology has a market capitalization of NT$10.6b, so these liabilities are probably manageable. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. While it does have liabilities worth noting, Grand Process Technology also has more cash than debt, so we're pretty confident it can manage its debt safely.

On top of that, Grand Process Technology grew its EBIT by 51% over the last twelve months, and that growth will make it easier to handle its debt. There's no doubt that we learn most about debt from the balance sheet. But it is Grand Process Technology'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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. Grand Process Technology 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 most recent three years, Grand Process Technology recorded free cash flow worth 69% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This free cash flow puts the company in a good position to pay down debt, when appropriate.

Summing up

While it is always sensible to look at a company's total liabilities, it is very reassuring that Grand Process Technology has NT$696.1m in net cash. And it impressed us with its EBIT growth of 51% over the last year. So we don't think Grand Process Technology's use of debt is risky. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. Case in point: We've spotted 2 warning signs for Grand Process Technology you should be aware of, and 1 of them shouldn't be ignored.

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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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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