V-TAC TechnologyLtd (GTSM:6229) Seems To Use Debt Quite Sensibly

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' 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. As with many other companies V-TAC Technology Co.,Ltd. (GTSM:6229) makes use of debt. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

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. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for V-TAC TechnologyLtd

How Much Debt Does V-TAC TechnologyLtd Carry?

As you can see below, at the end of September 2020, V-TAC TechnologyLtd had NT$78.0m of debt, up from NT$55.0m a year ago. Click the image for more detail. However, its balance sheet shows it holds NT$162.7m in cash, so it actually has NT$84.7m net cash.

A Look At V-TAC TechnologyLtd's Liabilities

According to the last reported balance sheet, V-TAC TechnologyLtd had liabilities of NT$444.5m due within 12 months, and liabilities of NT$29.0m due beyond 12 months. On the other hand, it had cash of NT$162.7m and NT$194.9m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by NT$115.8m.

Of course, V-TAC TechnologyLtd has a market capitalization of NT$1.14b, so these liabilities are probably manageable. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. Despite its noteworthy liabilities, V-TAC TechnologyLtd boasts net cash, so it's fair to say it does not have a heavy debt load!

On top of that, V-TAC TechnologyLtd grew its EBIT by 86% over the last twelve months, and that growth will make it easier to handle its debt. When analysing debt levels, the balance sheet is the obvious place to start. But it is V-TAC TechnologyLtd'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.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. 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. Considering the last three years, V-TAC TechnologyLtd actually recorded a cash outflow, overall. Debt is far more risky for companies with unreliable free cash flow, so shareholders should be hoping that the past expenditure will produce free cash flow in the future.

Summing up

Although V-TAC TechnologyLtd's balance sheet isn't particularly strong, due to the total liabilities, it is clearly positive to see that it has net cash of NT$84.7m. And it impressed us with its EBIT growth of 86% over the last year. So we don't have any problem with V-TAC TechnologyLtd's use of debt. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. To that end, you should be aware of the 3 warning signs we've spotted with V-TAC TechnologyLtd .

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

If you’re looking to trade V-TAC TechnologyLtd, open an account with the lowest-cost* platform trusted by professionals, Interactive Brokers. Their clients from over 200 countries and territories trade stocks, options, futures, forex, bonds and funds worldwide from a single integrated account. Promoted

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.
^*Interactive Brokers Rated Lowest Cost Broker by StockBrokers.com Annual Online Review 2020

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.