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.
What Risk Does Debt Bring?
Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. 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.
What Is Princeton Technology's Net Debt?
As you can see below, Princeton Technology had NT$130.7m of debt at September 2020, down from NT$201.4m a year prior. But on the other hand it also has NT$821.8m in cash, leading to a NT$691.0m net cash position.
How Strong Is Princeton Technology's Balance Sheet?
According to the last reported balance sheet, Princeton Technology had liabilities of NT$251.2m due within 12 months, and liabilities of NT$78.4m due beyond 12 months. On the other hand, it had cash of NT$821.8m and NT$227.2m worth of receivables due within a year. So it actually has NT$719.3m more liquid assets than total liabilities.
This surplus suggests that Princeton Technology is using debt in a way that is appears to be both safe and conservative. Due to its strong net asset position, it is not likely to face issues with its lenders. Succinctly put, Princeton Technology boasts net cash, so it's fair to say it does not have a heavy debt load! There's no doubt that we learn most about debt from the balance sheet. But it is Princeton Technology's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.
Over 12 months, Princeton Technology made a loss at the EBIT level, and saw its revenue drop to NT$1.0b, which is a fall of 4.3%. That's not what we would hope to see.
So How Risky Is Princeton Technology?
Although Princeton Technology had an earnings before interest and tax (EBIT) loss over the last twelve months, it generated positive free cash flow of NT$97m. So although it is loss-making, it doesn't seem to have too much near-term balance sheet risk, keeping in mind the net cash. 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. However, not all investment risk resides within the balance sheet - far from it. For instance, we've identified 2 warning signs for Princeton Technology (1 is a bit concerning) you should be aware of.
If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.
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