Is Forward Electronics (GTSM:8085) A Risky Investment?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. We can see that Forward Electronics Co., Ltd. (GTSM:8085) does use debt in its business. But should shareholders be worried about its use of debt?

When Is Debt Dangerous?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. 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.

Check out our latest analysis for Forward Electronics

What Is Forward Electronics's Debt?

The chart below, which you can click on for greater detail, shows that Forward Electronics had NT$749.6m in debt in December 2020; about the same as the year before. However, it does have NT$1.54b in cash offsetting this, leading to net cash of NT$786.1m.

A Look At Forward Electronics' Liabilities

According to the last reported balance sheet, Forward Electronics had liabilities of NT$323.8m due within 12 months, and liabilities of NT$1.06b due beyond 12 months. Offsetting this, it had NT$1.54b in cash and NT$265.1m in receivables that were due within 12 months. So it can boast NT$415.2m more liquid assets than total liabilities.

This surplus suggests that Forward Electronics has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, Forward Electronics boasts net cash, so it's fair to say it does not have a heavy debt load! The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since Forward Electronics will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Over 12 months, Forward Electronics made a loss at the EBIT level, and saw its revenue drop to NT$811m, which is a fall of 18%. We would much prefer see growth.

So How Risky Is Forward Electronics?

By their very nature companies that are losing money are more risky than those with a long history of profitability. And the fact is that over the last twelve months Forward Electronics lost money at the earnings before interest and tax (EBIT) line. And over the same period it saw negative free cash outflow of NT$93m and booked a NT$74m accounting loss. But the saving grace is the NT$786.1m on the balance sheet. That means it could keep spending at its current rate for more than two years. Even though its balance sheet seems sufficiently liquid, debt always makes us a little nervous if a company doesn't produce free cash flow regularly. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. Be aware that Forward Electronics is showing 2 warning signs in our investment analysis , and 1 of those is a bit concerning...

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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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