Stock Analysis

Does ASolid Technology (GTSM:6485) Have A Healthy Balance Sheet?

TPEX:6485
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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.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. Importantly, ASolid Technology Co., Ltd. (GTSM:6485) does carry debt. But the real question is whether this debt is making the company risky.

What Risk Does Debt Bring?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. 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.

See our latest analysis for ASolid Technology

How Much Debt Does ASolid Technology Carry?

The image below, which you can click on for greater detail, shows that ASolid Technology had debt of NT$87.3m at the end of September 2020, a reduction from NT$161.4m over a year. But it also has NT$430.7m in cash to offset that, meaning it has NT$343.4m net cash.

debt-equity-history-analysis
GTSM:6485 Debt to Equity History December 9th 2020

How Strong Is ASolid Technology's Balance Sheet?

We can see from the most recent balance sheet that ASolid Technology had liabilities of NT$325.2m falling due within a year, and liabilities of NT$4.99m due beyond that. Offsetting this, it had NT$430.7m in cash and NT$242.3m in receivables that were due within 12 months. So it actually has NT$342.8m more liquid assets than total liabilities.

It's good to see that ASolid Technology has plenty of liquidity on its balance sheet, suggesting conservative management of liabilities. Because it has plenty of assets, it is unlikely to have trouble with its lenders. Simply put, the fact that ASolid Technology has more cash than debt is arguably a good indication that it can manage its debt safely.

Importantly, ASolid Technology's EBIT fell a jaw-dropping 87% in the last twelve months. If that decline continues then paying off debt will be harder than selling foie gras at a vegan convention. The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since ASolid Technology 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. ASolid Technology 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. Over the last three years, ASolid Technology actually produced more free cash flow than EBIT. 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 investigate a company's debt, in this case ASolid Technology has NT$343.4m in net cash and a decent-looking balance sheet. And it impressed us with free cash flow of NT$192m, being 118% of its EBIT. So we don't have any problem with ASolid Technology's use of debt. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. Consider for instance, the ever-present spectre of investment risk. We've identified 4 warning signs with ASolid Technology (at least 1 which makes us a bit uncomfortable) , and understanding them should be part of your investment process.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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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