Calitech (GTSM:6532) Has A Pretty Healthy Balance Sheet

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. We note that Calitech Co., Ltd. (GTSM:6532) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

When Is Debt Dangerous?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. 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 step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for Calitech

What Is Calitech's Debt?

You can click the graphic below for the historical numbers, but it shows that as of September 2020 Calitech had NT$65.2m of debt, an increase on none, over one year. However, its balance sheet shows it holds NT$380.5m in cash, so it actually has NT$315.3m net cash.

How Healthy Is Calitech's Balance Sheet?

The latest balance sheet data shows that Calitech had liabilities of NT$131.8m due within a year, and liabilities of NT$71.4m falling due after that. On the other hand, it had cash of NT$380.5m and NT$106.7m worth of receivables due within a year. So it actually has NT$283.9m more liquid assets than total liabilities.

This surplus suggests that Calitech has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Simply put, the fact that Calitech has more cash than debt is arguably a good indication that it can manage its debt safely.

In addition to that, we're happy to report that Calitech has boosted its EBIT by 59%, thus reducing the spectre of future debt repayments. There's no doubt that we learn most about debt from the balance sheet. But it is Calitech'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.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. Calitech 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, Calitech created free cash flow amounting to 8.6% of its EBIT, an uninspiring performance. For us, cash conversion that low sparks a little paranoia about is ability to extinguish debt.

Summing up

While we empathize with investors who find debt concerning, you should keep in mind that Calitech has net cash of NT$315.3m, as well as more liquid assets than liabilities. And it impressed us with its EBIT growth of 59% over the last year. So is Calitech's debt a risk? It doesn't seem so to us. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. Be aware that Calitech is showing 4 warning signs in our investment analysis , and 1 of those doesn't sit too well with us...

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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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