Is iROC (GTSM:3555) Using Too Much Debt?

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' 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. As with many other companies iROC Co., Ltd. (GTSM:3555) makes use of debt. But the real question is whether this debt is making the company risky.

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for iROC

How Much Debt Does iROC Carry?

You can click the graphic below for the historical numbers, but it shows that iROC had NT$45.8m of debt in September 2020, down from NT$60.0m, one year before. However, it does have NT$241.0m in cash offsetting this, leading to net cash of NT$195.1m.

How Healthy Is iROC's Balance Sheet?

According to the last reported balance sheet, iROC had liabilities of NT$55.7m due within 12 months, and liabilities of NT$2.26m due beyond 12 months. On the other hand, it had cash of NT$241.0m and NT$72.6m worth of receivables due within a year. So it actually has NT$255.5m more liquid assets than total liabilities.

It's good to see that iROC has plenty of liquidity on its balance sheet, suggesting conservative management of liabilities. Given it has easily adequate short term liquidity, we don't think it will have any issues with its lenders. Simply put, the fact that iROC has more cash than debt is arguably a good indication that it can manage its debt safely. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since iROC 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 iROC wasn't profitable at an EBIT level, but managed to grow its revenue by 12%, to NT$190m. That rate of growth is a bit slow for our taste, but it takes all types to make a world.

So How Risky Is iROC?

Although iROC had an earnings before interest and tax (EBIT) loss over the last twelve months, it generated positive free cash flow of NT$3.2m. 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. We'll feel more comfortable with the stock once EBIT is positive, given the lacklustre revenue growth. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. Consider risks, for instance. Every company has them, and we've spotted 1 warning sign for iROC you should know about.

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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