Winstek Semiconductor (GTSM:3265) Seems To Use Debt Rather Sparingly

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.' 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 Winstek Semiconductor Co., Ltd. (GTSM:3265) makes use of debt. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for Winstek Semiconductor

What Is Winstek Semiconductor's Debt?

As you can see below, Winstek Semiconductor had NT$637.5m of debt at September 2020, down from NT$720.0m a year prior. However, its balance sheet shows it holds NT$3.15b in cash, so it actually has NT$2.51b net cash.

How Strong Is Winstek Semiconductor's Balance Sheet?

According to the last reported balance sheet, Winstek Semiconductor had liabilities of NT$699.4m due within 12 months, and liabilities of NT$459.5m due beyond 12 months. Offsetting this, it had NT$3.15b in cash and NT$682.2m in receivables that were due within 12 months. So it can boast NT$2.67b more liquid assets than total liabilities.

This surplus strongly suggests that Winstek Semiconductor has a rock-solid balance sheet (and the debt is of no concern whatsoever). On this basis we think its balance sheet is strong like a sleek panther or even a proud lion. Simply put, the fact that Winstek Semiconductor has more cash than debt is arguably a good indication that it can manage its debt safely.

Better yet, Winstek Semiconductor grew its EBIT by 2,065% last year, which is an impressive improvement. That boost will make it even easier to pay down debt going forward. The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since Winstek Semiconductor will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. While Winstek Semiconductor 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, Winstek Semiconductor actually produced more free cash flow than EBIT. There's nothing better than incoming cash when it comes to staying in your lenders' good graces.

Summing up

While it is always sensible to investigate a company's debt, in this case Winstek Semiconductor has NT$2.51b in net cash and a decent-looking balance sheet. And it impressed us with free cash flow of NT$670m, being 127% of its EBIT. At the end of the day we're not concerned about Winstek Semiconductor's debt. 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. Take risks, for example - Winstek Semiconductor has 1 warning sign we think 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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