Does Gallant Micro. Machining (GTSM:6640) Have A Healthy Balance Sheet?

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.' 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 Gallant Micro. Machining Co., LTD. (GTSM:6640) makes use of debt. But should shareholders be worried about its use of debt?

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. 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.

See our latest analysis for Gallant Micro. Machining

What Is Gallant Micro. Machining's Net Debt?

The image below, which you can click on for greater detail, shows that at September 2020 Gallant Micro. Machining had debt of NT$453.0m, up from NT$305.6m in one year. However, it does have NT$749.2m in cash offsetting this, leading to net cash of NT$296.3m.

How Healthy Is Gallant Micro. Machining's Balance Sheet?

The latest balance sheet data shows that Gallant Micro. Machining had liabilities of NT$742.5m due within a year, and liabilities of NT$254.6m falling due after that. Offsetting these obligations, it had cash of NT$749.2m as well as receivables valued at NT$385.9m due within 12 months. So it can boast NT$138.1m more liquid assets than total liabilities.

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

In fact Gallant Micro. Machining's saving grace is its low debt levels, because its EBIT has tanked 23% in the last twelve months. When a company sees its earnings tank, it can sometimes find its relationships with its lenders turn sour. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Gallant Micro. Machining 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, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While Gallant Micro. Machining has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. Happily for any shareholders, Gallant Micro. Machining actually produced more free cash flow than EBIT over the last three years. 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 it is always sensible to investigate a company's debt, in this case Gallant Micro. Machining has NT$296.3m in net cash and a decent-looking balance sheet. The cherry on top was that in converted 104% of that EBIT to free cash flow, bringing in -NT$29m. So we don't have any problem with Gallant Micro. Machining'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. Be aware that Gallant Micro. Machining is showing 5 warning signs in our investment analysis , and 2 of those shouldn't be ignored...

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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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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