Would Silicon Touch Technology (GTSM:3288) Be Better Off With Less Debt?

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.' 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. Importantly, Silicon Touch Technology Inc. (GTSM:3288) does carry debt. But the real question is whether this debt is making the company risky.

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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, plenty of companies use debt to fund growth, without any negative consequences. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for Silicon Touch Technology

What Is Silicon Touch Technology's Net Debt?

The image below, which you can click on for greater detail, shows that at December 2020 Silicon Touch Technology had debt of NT$45.4m, up from NT$26.8m in one year. However, it also had NT$4.48m in cash, and so its net debt is NT$40.9m.

How Healthy Is Silicon Touch Technology's Balance Sheet?

We can see from the most recent balance sheet that Silicon Touch Technology had liabilities of NT$102.5m falling due within a year, and liabilities of NT$60.3m due beyond that. On the other hand, it had cash of NT$4.48m and NT$44.8m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by NT$113.5m.

This deficit isn't so bad because Silicon Touch Technology is worth NT$515.5m, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. However, it is still worthwhile taking a close look at its ability to pay off debt. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Silicon Touch Technology 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.

Over 12 months, Silicon Touch Technology made a loss at the EBIT level, and saw its revenue drop to NT$101m, which is a fall of 16%. We would much prefer see growth.

Caveat Emptor

Not only did Silicon Touch Technology's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). Indeed, it lost NT$22m at the EBIT level. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. So we think its balance sheet is a little strained, though not beyond repair. Another cause for caution is that is bled NT$7.6m in negative free cash flow over the last twelve months. So suffice it to say we do consider the stock to be risky. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. For example, we've discovered 3 warning signs for Silicon Touch Technology that you should be aware of before investing here.

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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