Would Crystalwise Technology (GTSM:4944) Be Better Off With Less 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 Crystalwise Technology Inc. (GTSM:4944) does use debt in its business. But should shareholders be worried about its use of debt?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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 examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for Crystalwise Technology

What Is Crystalwise Technology's Debt?

As you can see below, Crystalwise Technology had NT$607.2m of debt at December 2020, down from NT$1.52b a year prior. However, it also had NT$177.3m in cash, and so its net debt is NT$429.9m.

A Look At Crystalwise Technology's Liabilities

Zooming in on the latest balance sheet data, we can see that Crystalwise Technology had liabilities of NT$769.7m due within 12 months and liabilities of NT$211.8m due beyond that. Offsetting these obligations, it had cash of NT$177.3m as well as receivables valued at NT$183.5m due within 12 months. So its liabilities total NT$620.7m more than the combination of its cash and short-term receivables.

Given Crystalwise Technology has a market capitalization of NT$3.29b, it's hard to believe these liabilities pose much threat. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Crystalwise Technology's earnings that will influence how the balance sheet holds up in the future. 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 Crystalwise Technology had a loss before interest and tax, and actually shrunk its revenue by 40%, to NT$371m. 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$244m 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. Another cause for caution is that is bled NT$316m in negative free cash flow over the last twelve months. So suffice it to say we consider the stock very risky. 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. For example - Crystalwise Technology has 1 warning sign we think you should be aware of.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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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