Here's Why Tradetool Auto (GTSM:3685) Can Afford Some Debt

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. We can see that Tradetool Auto Co., Ltd. (GTSM:3685) does use debt in its business. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for Tradetool Auto

How Much Debt Does Tradetool Auto Carry?

The image below, which you can click on for greater detail, shows that at December 2020 Tradetool Auto had debt of NT$499.6m, up from NT$361.2m in one year. On the flip side, it has NT$408.5m in cash leading to net debt of about NT$91.1m.

A Look At Tradetool Auto's Liabilities

Zooming in on the latest balance sheet data, we can see that Tradetool Auto had liabilities of NT$541.5m due within 12 months and liabilities of NT$408.2m due beyond that. On the other hand, it had cash of NT$408.5m and NT$392.7m worth of receivables due within a year. So it has liabilities totalling NT$148.4m more than its cash and near-term receivables, combined.

Of course, Tradetool Auto has a market capitalization of NT$2.67b, so these liabilities are probably manageable. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Tradetool Auto 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 Tradetool Auto wasn't profitable at an EBIT level, but managed to grow its revenue by 5.0%, to NT$969m. We usually like to see faster growth from unprofitable companies, but each to their own.

Caveat Emptor

Importantly, Tradetool Auto had an earnings before interest and tax (EBIT) loss over the last year. To be specific the EBIT loss came in at NT$15m. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. So we think its balance sheet is a little strained, though not beyond repair. Another cause for caution is that is bled NT$1.4m in negative free cash flow over the last twelve months. So suffice it to say we do consider the stock to be risky. 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. For example, we've discovered 4 warning signs for Tradetool Auto (1 is a bit unpleasant!) that you should be aware of before investing here.

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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