Securitag Assembly Group (GTSM:6417) Seems To Use Debt Rather Sparingly

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.' 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 Securitag Assembly Group Co., Ltd. (GTSM:6417) makes use of debt. But the more important question is: how much risk is that debt creating?

When Is Debt Dangerous?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. 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 Net Debt?

The chart below, which you can click on for greater detail, shows that Securitag Assembly Group had NT$241.9m in debt in December 2020; about the same as the year before. However, it does have NT$367.5m in cash offsetting this, leading to net cash of NT$125.6m.

How Strong Is Securitag Assembly Group's Balance Sheet?

We can see from the most recent balance sheet that Securitag Assembly Group had liabilities of NT$231.5m falling due within a year, and liabilities of NT$254.4m due beyond that. Offsetting this, it had NT$367.5m in cash and NT$136.2m in receivables that were due within 12 months. So it can boast NT$17.8m 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$2.70b 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.

Also positive, Securitag Assembly Group grew its EBIT by 26% in the last year, and that should make it easier to pay down debt, going forward. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Securitag Assembly Group 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. Securitag Assembly Group may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. During the last three years, Securitag Assembly Group produced sturdy free cash flow equating to 73% of its EBIT, about what we'd expect. This cold hard cash means it can reduce its debt when it wants to.

Summing up

While we empathize with investors who find debt concerning, you should keep in mind that Securitag Assembly Group has net cash of NT$125.6m, as well as more liquid assets than liabilities. And it impressed us with its EBIT growth of 26% over the last year. So is Securitag Assembly Group's debt a risk? It doesn't seem so to us. 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 example - Securitag Assembly Group has 1 warning sign we think you should be aware of.

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.

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