ThinTech Materials Technology (GTSM:3663) Has A Rock Solid Balance Sheet

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.' 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, ThinTech Materials Technology Co., Ltd. (GTSM:3663) 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. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

See our latest analysis for ThinTech Materials Technology

What Is ThinTech Materials Technology's Net Debt?

As you can see below, ThinTech Materials Technology had NT$91.8m of debt at September 2020, down from NT$147.9m a year prior. However, it does have NT$282.9m in cash offsetting this, leading to net cash of NT$191.2m.

How Healthy Is ThinTech Materials Technology's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that ThinTech Materials Technology had liabilities of NT$391.3m due within 12 months and liabilities of NT$119.4m due beyond that. On the other hand, it had cash of NT$282.9m and NT$337.2m worth of receivables due within a year. So it can boast NT$109.5m more liquid assets than total liabilities.

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

In addition to that, we're happy to report that ThinTech Materials Technology has boosted its EBIT by 72%, thus reducing the spectre of future debt repayments. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since ThinTech Materials Technology 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 company can only pay off debt with cold hard cash, not accounting profits. ThinTech Materials Technology 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. Happily for any shareholders, ThinTech Materials Technology actually produced more free cash flow than EBIT over the last three years. 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 ThinTech Materials Technology has NT$191.2m in net cash and a decent-looking balance sheet. The cherry on top was that in converted 288% of that EBIT to free cash flow, bringing in NT$130m. So is ThinTech Materials Technology's debt a risk? It doesn't seem so to us. 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 ThinTech Materials Technology is showing 4 warning signs in our investment analysis , you should know about...

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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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