These 4 Measures Indicate That Single Well Industrial (GTSM:3490) Is Using Debt Safely

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.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. As with many other companies Single Well Industrial Corporation (GTSM:3490) makes use of debt. But should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. If things get really bad, the lenders can take control of the business. 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. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for Single Well Industrial

How Much Debt Does Single Well Industrial Carry?

As you can see below, at the end of September 2020, Single Well Industrial had NT$183.8m of debt, up from NT$143.0m a year ago. Click the image for more detail. However, it does have NT$224.8m in cash offsetting this, leading to net cash of NT$40.9m.

How Healthy Is Single Well Industrial's Balance Sheet?

The latest balance sheet data shows that Single Well Industrial had liabilities of NT$239.6m due within a year, and liabilities of NT$177.3m falling due after that. Offsetting these obligations, it had cash of NT$224.8m as well as receivables valued at NT$113.4m due within 12 months. So it has liabilities totalling NT$78.7m more than its cash and near-term receivables, combined.

Since publicly traded Single Well Industrial shares are worth a total of NT$1.86b, it seems unlikely that this level of liabilities would be a major threat. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. Despite its noteworthy liabilities, Single Well Industrial boasts net cash, so it's fair to say it does not have a heavy debt load!

It was also good to see that despite losing money on the EBIT line last year, Single Well Industrial turned things around in the last 12 months, delivering and EBIT of NT$950k. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Single Well Industrial 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. Single Well Industrial 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 last year, Single Well Industrial actually produced more free cash flow than EBIT. That sort of strong cash generation warms our hearts like a puppy in a bumblebee suit.

Summing up

While it is always sensible to look at a company's total liabilities, it is very reassuring that Single Well Industrial has NT$40.9m in net cash. The cherry on top was that in converted 10,251% of that EBIT to free cash flow, bringing in NT$97m. So we don't think Single Well Industrial'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. Be aware that Single Well Industrial is showing 3 warning signs in our investment analysis , and 1 of those doesn't sit too well with us...

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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