TM Technology (GTSM:5468) Is Carrying A Fair Bit Of Debt

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that '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. Importantly, TM Technology, Inc. (GTSM:5468) does carry debt. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. 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.

View our latest analysis for TM Technology

What Is TM Technology's Debt?

As you can see below, at the end of December 2020, TM Technology had NT$108.7m of debt, up from NT$48.9m a year ago. Click the image for more detail. However, because it has a cash reserve of NT$40.2m, its net debt is less, at about NT$68.4m.

How Healthy Is TM Technology's Balance Sheet?

According to the last reported balance sheet, TM Technology had liabilities of NT$105.9m due within 12 months, and liabilities of NT$48.2m due beyond 12 months. Offsetting these obligations, it had cash of NT$40.2m as well as receivables valued at NT$7.05m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by NT$106.9m.

Of course, TM Technology has a market capitalization of NT$595.4m, so these liabilities are probably manageable. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. The balance sheet is clearly the area to focus on when you are analysing debt. But it is TM 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 TM Technology wasn't profitable at an EBIT level, but managed to grow its revenue by 5.2%, to NT$143m. We usually like to see faster growth from unprofitable companies, but each to their own.

Caveat Emptor

Importantly, TM Technology had an earnings before interest and tax (EBIT) loss over the last year. To be specific the EBIT loss came in at NT$7.5m. 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. However, it doesn't help that it burned through NT$54m of cash over the last year. So in short it's a really risky stock. 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. For instance, we've identified 4 warning signs for TM Technology (1 is potentially serious) you should be aware of.

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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