Health Check: How Prudently Does Princeton Technology (GTSM:6129) Use 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.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. Importantly, Princeton Technology Corporation (GTSM:6129) does carry debt. But the real question is whether this debt is making the company risky.

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. 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, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for Princeton Technology

How Much Debt Does Princeton Technology Carry?

You can click the graphic below for the historical numbers, but it shows that Princeton Technology had NT$127.9m of debt in December 2020, down from NT$194.5m, one year before. However, it does have NT$872.0m in cash offsetting this, leading to net cash of NT$744.1m.

How Strong Is Princeton Technology's Balance Sheet?

According to the last reported balance sheet, Princeton Technology had liabilities of NT$312.6m due within 12 months, and liabilities of NT$32.8m due beyond 12 months. Offsetting this, it had NT$872.0m in cash and NT$267.8m in receivables that were due within 12 months. So it can boast NT$794.5m more liquid assets than total liabilities.

This short term liquidity is a sign that Princeton Technology could probably pay off its debt with ease, as its balance sheet is far from stretched. Simply put, the fact that Princeton Technology has more cash than debt is arguably a good indication that it can manage its debt safely. 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 Princeton 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, Princeton Technology saw its revenue hold pretty steady, and it did not report positive earnings before interest and tax. While that's not too bad, we'd prefer see growth.

So How Risky Is Princeton Technology?

While Princeton Technology lost money on an earnings before interest and tax (EBIT) level, it actually generated positive free cash flow NT$127m. So taking that on face value, and considering the net cash situation, we don't think that the stock is too risky in the near term. We'll feel more comfortable with the stock once EBIT is positive, given the lacklustre revenue growth. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. These risks can be hard to spot. Every company has them, and we've spotted 2 warning signs for Princeton Technology (of which 1 shouldn't be ignored!) you should know about.

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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