Is Microcosm Technology (GTSM:3354) Using Too Much 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.' 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, Microcosm Technology Co., Ltd. (GTSM:3354) 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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

Check out our latest analysis for Microcosm Technology

What Is Microcosm Technology's Debt?

The chart below, which you can click on for greater detail, shows that Microcosm Technology had NT$285.4m in debt in September 2020; about the same as the year before. But it also has NT$433.4m in cash to offset that, meaning it has NT$148.0m net cash.

How Healthy Is Microcosm Technology's Balance Sheet?

The latest balance sheet data shows that Microcosm Technology had liabilities of NT$335.1m due within a year, and liabilities of NT$88.4m falling due after that. Offsetting this, it had NT$433.4m in cash and NT$99.9m in receivables that were due within 12 months. So it can boast NT$109.8m more liquid assets than total liabilities.

This surplus suggests that Microcosm Technology has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, Microcosm Technology boasts net cash, so it's fair to say it does not have a heavy debt load! 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 Microcosm 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.

In the last year Microcosm Technology had a loss before interest and tax, and actually shrunk its revenue by 26%, to NT$322m. To be frank that doesn't bode well.

So How Risky Is Microcosm Technology?

Although Microcosm Technology had an earnings before interest and tax (EBIT) loss over the last twelve months, it generated positive free cash flow of NT$51m. So although it is loss-making, it doesn't seem to have too much near-term balance sheet risk, keeping in mind the net cash. With mediocre revenue growth in the last year, we're don't find the investment opportunity particularly compelling. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. Be aware that Microcosm Technology is showing 2 warning signs in our investment analysis , you should know about...

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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