Is Securitag Assembly Group (GTSM:6417) A Risky Investment?

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. We can see that Securitag Assembly Group Co., Ltd. (GTSM:6417) does use debt in its business. But the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

Check out our latest analysis for Securitag Assembly Group

What Is Securitag Assembly Group's Debt?

As you can see below, Securitag Assembly Group had NT$244.5m of debt, at September 2020, which is about the same as the year before. You can click the chart for greater detail. However, its balance sheet shows it holds NT$317.3m in cash, so it actually has NT$72.7m net cash.

How Healthy Is Securitag Assembly Group's Balance Sheet?

We can see from the most recent balance sheet that Securitag Assembly Group had liabilities of NT$181.3m falling due within a year, and liabilities of NT$254.7m due beyond that. Offsetting this, it had NT$317.3m in cash and NT$141.9m in receivables that were due within 12 months. So it actually has NT$23.1m more liquid assets than total liabilities.

Having regard to Securitag Assembly Group's size, it seems that its liquid assets are well balanced with its total liabilities. So while it's hard to imagine that the NT$2.50b company is struggling for cash, we still think it's worth monitoring its balance sheet. Simply put, the fact that Securitag Assembly Group has more cash than debt is arguably a good indication that it can manage its debt safely.

On top of that, Securitag Assembly Group grew its EBIT by 56% 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 Securitag Assembly Group'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, a company can only pay off debt with cold hard cash, not accounting profits. While Securitag Assembly Group 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. Over the last three years, Securitag Assembly Group recorded negative free cash flow, in total. Debt is usually more expensive, and almost always more risky in the hands of a company with negative free cash flow. Shareholders ought to hope for an improvement.

Summing up

While it is always sensible to investigate a company's debt, in this case Securitag Assembly Group has NT$72.7m in net cash and a decent-looking balance sheet. And it impressed us with its EBIT growth of 56% over the last year. So we don't have any problem with Securitag Assembly Group's use of debt. 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. For instance, we've identified 2 warning signs for Securitag Assembly Group (1 is a bit concerning) you should be aware of.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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