We Think Gallant Precision Machining (GTSM:5443) Can Stay On Top Of Its Debt

Warren Buffett famously said, '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. We note that Gallant Precision Machining Co., Ltd. (GTSM:5443) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. 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 Gallant Precision Machining

What Is Gallant Precision Machining's Net Debt?

You can click the graphic below for the historical numbers, but it shows that Gallant Precision Machining had NT$1.36b of debt in September 2020, down from NT$1.50b, one year before. But on the other hand it also has NT$2.04b in cash, leading to a NT$676.6m net cash position.

How Healthy Is Gallant Precision Machining's Balance Sheet?

According to the last reported balance sheet, Gallant Precision Machining had liabilities of NT$2.29b due within 12 months, and liabilities of NT$878.7m due beyond 12 months. Offsetting these obligations, it had cash of NT$2.04b as well as receivables valued at NT$1.46b due within 12 months. So it can boast NT$333.3m more liquid assets than total liabilities.

This short term liquidity is a sign that Gallant Precision Machining could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, Gallant Precision Machining boasts net cash, so it's fair to say it does not have a heavy debt load!

It is just as well that Gallant Precision Machining's load is not too heavy, because its EBIT was down 40% over the last year. When it comes to paying off debt, falling earnings are no more useful than sugary sodas are for your health. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Gallant Precision Machining 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, while the tax-man may adore accounting profits, lenders only accept cold hard cash. Gallant Precision Machining 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. Over the last three years, Gallant Precision Machining recorded free cash flow worth a fulsome 96% of its EBIT, which is stronger than we'd usually expect. That positions it well to pay down debt if desirable to do so.

Summing up

While we empathize with investors who find debt concerning, you should keep in mind that Gallant Precision Machining has net cash of NT$676.6m, as well as more liquid assets than liabilities. The cherry on top was that in converted 96% of that EBIT to free cash flow, bringing in NT$647m. So we are not troubled with Gallant Precision Machining's debt use. 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. We've identified 5 warning signs with Gallant Precision Machining (at least 1 which is potentially serious) , and understanding them should be part of your investment process.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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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