Here's Why Crystalwise Technology (GTSM:4944) Can Afford Some Debt

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. We note that Crystalwise Technology Inc. (GTSM:4944) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. If things get really bad, the lenders can take control of the business. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for Crystalwise Technology

What Is Crystalwise Technology's Net Debt?

As you can see below, Crystalwise Technology had NT$603.9m of debt at September 2020, down from NT$1.64b a year prior. On the flip side, it has NT$281.5m in cash leading to net debt of about NT$322.3m.

How Healthy Is Crystalwise Technology's Balance Sheet?

According to the last reported balance sheet, Crystalwise Technology had liabilities of NT$500.4m due within 12 months, and liabilities of NT$498.5m due beyond 12 months. Offsetting these obligations, it had cash of NT$281.5m as well as receivables valued at NT$110.1m due within 12 months. So it has liabilities totalling NT$607.3m more than its cash and near-term receivables, combined.

While this might seem like a lot, it is not so bad since Crystalwise Technology has a market capitalization of NT$2.87b, and so it could probably strengthen its balance sheet by raising capital if it needed to. However, it is still worthwhile taking a close look at its ability to pay off debt. 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 Crystalwise 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.

Over 12 months, Crystalwise Technology made a loss at the EBIT level, and saw its revenue drop to NT$360m, which is a fall of 55%. To be frank that doesn't bode well.

Caveat Emptor

Not only did Crystalwise Technology's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). Indeed, it lost NT$273m at the EBIT level. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. So we think its balance sheet is a little strained, though not beyond repair. However, it doesn't help that it burned through NT$221m of cash over the last year. So suffice it to say we consider the stock very risky. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. Consider for instance, the ever-present spectre of investment risk. We've identified 1 warning sign with Crystalwise Technology , and understanding them should be part of your investment process.

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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