Here's Why TM Technology (GTSM:5468) 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 TM Technology, Inc. (GTSM:5468) does use debt in its business. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

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. If things get really bad, the lenders can take control of the business. 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. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for TM Technology

What Is TM Technology's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of September 2020 TM Technology had NT$109.2m of debt, an increase on NT$63.9m, over one year. However, it also had NT$31.3m in cash, and so its net debt is NT$77.9m.

A Look At TM Technology's Liabilities

We can see from the most recent balance sheet that TM Technology had liabilities of NT$104.5m falling due within a year, and liabilities of NT$49.9m due beyond that. Offsetting this, it had NT$31.3m in cash and NT$8.28m in receivables that were due within 12 months. So it has liabilities totalling NT$114.8m more than its cash and near-term receivables, combined.

This deficit isn't so bad because TM Technology is worth NT$292.4m, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since TM 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.

In the last year TM Technology wasn't profitable at an EBIT level, but managed to grow its revenue by 11%, to NT$140m. We usually like to see faster growth from unprofitable companies, but each to their own.

Caveat Emptor

Over the last twelve months TM Technology produced an earnings before interest and tax (EBIT) loss. Indeed, it lost NT$16m at the EBIT level. 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. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. However, it doesn't help that it burned through NT$63m of cash over the last year. So in short it's a really risky stock. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. For instance, we've identified 5 warning signs for TM Technology (2 can't be ignored) 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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