Is WinWay Technology (GTSM:6515) Using Too Much Debt?

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. As with many other companies WinWay Technology Co., Ltd. (GTSM:6515) makes use of debt. 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for WinWay Technology

What Is WinWay Technology's Debt?

The image below, which you can click on for greater detail, shows that at September 2020 WinWay Technology had debt of NT$148.0m, up from none in one year. But it also has NT$579.7m in cash to offset that, meaning it has NT$431.7m net cash.

A Look At WinWay Technology's Liabilities

According to the last reported balance sheet, WinWay Technology had liabilities of NT$810.6m due within 12 months, and liabilities of NT$78.3m due beyond 12 months. On the other hand, it had cash of NT$579.7m and NT$781.6m worth of receivables due within a year. So it can boast NT$472.4m more liquid assets than total liabilities.

This short term liquidity is a sign that WinWay Technology could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, WinWay Technology boasts net cash, so it's fair to say it does not have a heavy debt load!

And we also note warmly that WinWay Technology grew its EBIT by 12% last year, making its debt load easier to handle. When analysing debt levels, the balance sheet is the obvious place to start. But it is WinWay Technology'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, while the tax-man may adore accounting profits, lenders only accept cold hard cash. WinWay 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. In the last three years, WinWay Technology's free cash flow amounted to 42% of its EBIT, less than we'd expect. That's not great, when it comes to paying down debt.

Summing up

While we empathize with investors who find debt concerning, you should keep in mind that WinWay Technology has net cash of NT$431.7m, as well as more liquid assets than liabilities. On top of that, it increased its EBIT by 12% in the last twelve months. So we don't think WinWay Technology's use of debt is risky. Over time, share prices tend to follow earnings per share, so if you're interested in WinWay Technology, you may well want to click here to check an interactive graph of its earnings per share history.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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