GlobalWafers (GTSM:6488) Has A Pretty Healthy Balance Sheet

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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 GlobalWafers Co., Ltd. (GTSM:6488) does use debt in its business. But the more important question is: how much risk is that debt creating?

When Is Debt Dangerous?

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. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for GlobalWafers

What Is GlobalWafers's Net Debt?

As you can see below, GlobalWafers had NT$9.87b of debt, at December 2020, which is about the same as the year before. You can click the chart for greater detail. But it also has NT$33.6b in cash to offset that, meaning it has NT$23.7b net cash.

A Look At GlobalWafers' Liabilities

The latest balance sheet data shows that GlobalWafers had liabilities of NT$29.3b due within a year, and liabilities of NT$21.4b falling due after that. Offsetting this, it had NT$33.6b in cash and NT$8.04b in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by NT$9.04b.

Since publicly traded GlobalWafers shares are worth a very impressive total of NT$371.3b, it seems unlikely that this level of liabilities would be a major threat. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. Despite its noteworthy liabilities, GlobalWafers boasts net cash, so it's fair to say it does not have a heavy debt load!

On the other hand, GlobalWafers's EBIT dived 15%, over the last year. We think hat kind of performance, if repeated frequently, could well lead to difficulties for the stock. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine GlobalWafers's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. GlobalWafers 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, GlobalWafers recorded free cash flow worth a fulsome 90% of its EBIT, which is stronger than we'd usually expect. That puts it in a very strong position to pay down debt.

Summing up

We could understand if investors are concerned about GlobalWafers's liabilities, but we can be reassured by the fact it has has net cash of NT$23.7b. The cherry on top was that in converted 90% of that EBIT to free cash flow, bringing in NT$6.4b. So we are not troubled with GlobalWafers's debt use. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. Be aware that GlobalWafers is showing 3 warning signs in our investment analysis , and 1 of those makes us a bit uncomfortable...

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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