Stock Analysis

These 4 Measures Indicate That ASolid Technology (GTSM:6485) Is Using Debt Reasonably Well

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Warren Buffett famously said, '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. We can see that ASolid Technology Co., Ltd. (GTSM:6485) does use debt in its business. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. If things get really bad, the lenders can take control of the business. 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 think about a company's use of debt, we first look at cash and debt together.

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What Is ASolid Technology's Net Debt?

As you can see below, ASolid Technology had NT$87.3m of debt at September 2020, down from NT$161.4m a year prior. However, it does have NT$430.7m in cash offsetting this, leading to net cash of NT$343.4m.

GTSM:6485 Debt to Equity History March 18th 2021

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 these obligations, it had cash of NT$430.7m as well as receivables valued at NT$242.3m due within 12 months. So it actually has NT$342.8m more liquid assets than total liabilities.

This surplus suggests that ASolid Technology has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, ASolid Technology boasts net cash, so it's fair to say it does not have a heavy debt load!

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. When analysing debt levels, the balance sheet is the obvious place to start. But it is ASolid Technology's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. 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. That sort of strong cash conversion gets us as excited as the crowd when the beat drops at a Daft Punk concert.

Summing up

While we empathize with investors who find debt concerning, you should keep in mind that ASolid Technology has net cash of NT$343.4m, as well as more liquid assets than liabilities. The cherry on top was that in converted 118% of that EBIT to free cash flow, bringing in NT$192m. So we don't have any problem with ASolid Technology's use of debt. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. For example ASolid Technology has 4 warning signs (and 1 which is a bit unpleasant) we think you should know about.

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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