Tian Zheng International Precision Machinery (GTSM:6654) 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.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. We can see that Tian Zheng International Precision Machinery Co., Ltd. (GTSM:6654) does use debt in its business. But the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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 thing to do when considering how much debt a business uses is to look at its cash and debt together.

Check out our latest analysis for Tian Zheng International Precision Machinery

How Much Debt Does Tian Zheng International Precision Machinery Carry?

You can click the graphic below for the historical numbers, but it shows that Tian Zheng International Precision Machinery had NT$195.0m of debt in September 2020, down from NT$320.0m, one year before. However, its balance sheet shows it holds NT$456.3m in cash, so it actually has NT$261.3m net cash.

How Strong Is Tian Zheng International Precision Machinery's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Tian Zheng International Precision Machinery had liabilities of NT$444.7m due within 12 months and liabilities of NT$72.4m due beyond that. On the other hand, it had cash of NT$456.3m and NT$373.9m worth of receivables due within a year. So it can boast NT$313.1m more liquid assets than total liabilities.

It's good to see that Tian Zheng International Precision Machinery has plenty of liquidity on its balance sheet, suggesting conservative management of liabilities. Due to its strong net asset position, it is not likely to face issues with its lenders. Succinctly put, Tian Zheng International Precision Machinery boasts net cash, so it's fair to say it does not have a heavy debt load!

The modesty of its debt load may become crucial for Tian Zheng International Precision Machinery if management cannot prevent a repeat of the 52% cut to EBIT over the last year. When it comes to paying off debt, falling earnings are no more useful than sugary sodas are for your health. There's no doubt that we learn most about debt from the balance sheet. But it is Tian Zheng International Precision Machinery'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, a company can only pay off debt with cold hard cash, not accounting profits. While Tian Zheng International Precision Machinery 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. During the last three years, Tian Zheng International Precision Machinery produced sturdy free cash flow equating to 62% of its EBIT, about what we'd expect. This cold hard cash means it can reduce its debt when it wants to.

Summing up

While we empathize with investors who find debt concerning, you should keep in mind that Tian Zheng International Precision Machinery has net cash of NT$261.3m, as well as more liquid assets than liabilities. So we are not troubled with Tian Zheng International Precision Machinery's debt use. 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. Consider for instance, the ever-present spectre of investment risk. We've identified 3 warning signs with Tian Zheng International Precision Machinery , and understanding them should be part of your investment process.

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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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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