Does V-TAC TechnologyLtd (GTSM:6229) Have A Healthy Balance Sheet?

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. Importantly, V-TAC Technology Co.,Ltd. (GTSM:6229) does carry debt. But the real question is whether this debt is making the company risky.

When Is Debt A Problem?

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

Check out our latest analysis for V-TAC TechnologyLtd

What Is V-TAC TechnologyLtd's Debt?

The image below, which you can click on for greater detail, shows that at December 2020 V-TAC TechnologyLtd had debt of NT$76.2m, up from NT$34.0m in one year. However, it does have NT$219.2m in cash offsetting this, leading to net cash of NT$142.9m.

A Look At V-TAC TechnologyLtd's Liabilities

The latest balance sheet data shows that V-TAC TechnologyLtd had liabilities of NT$419.4m due within a year, and liabilities of NT$29.7m falling due after that. Offsetting these obligations, it had cash of NT$219.2m as well as receivables valued at NT$177.6m due within 12 months. So it has liabilities totalling NT$52.3m more than its cash and near-term receivables, combined.

Given V-TAC TechnologyLtd has a market capitalization of NT$1.35b, it's hard to believe these liabilities pose much threat. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. While it does have liabilities worth noting, V-TAC TechnologyLtd also has more cash than debt, so we're pretty confident it can manage its debt safely.

Better yet, V-TAC TechnologyLtd grew its EBIT by 128% last year, which is an impressive improvement. That boost will make it even easier to pay down debt going forward. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since V-TAC TechnologyLtd 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.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. While V-TAC TechnologyLtd has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. Happily for any shareholders, V-TAC TechnologyLtd actually produced more free cash flow than EBIT over the last two years. There's nothing better than incoming cash when it comes to staying in your lenders' good graces.

Summing up

While it is always sensible to look at a company's total liabilities, it is very reassuring that V-TAC TechnologyLtd has NT$142.9m in net cash. The cherry on top was that in converted 152% of that EBIT to free cash flow, bringing in NT$78m. So is V-TAC TechnologyLtd's debt a risk? It doesn't seem so to us. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. For example, we've discovered 3 warning signs for V-TAC TechnologyLtd that you should be aware of before investing here.

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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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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