Is Forward Electronics (GTSM:8085) Weighed On By Its Debt Load?

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a 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 Forward Electronics Co., Ltd. (GTSM:8085) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. If things get really bad, the lenders can take control of the business. 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, debt can be an important tool in businesses, particularly capital heavy businesses. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for Forward Electronics

How Much Debt Does Forward Electronics Carry?

The image below, which you can click on for greater detail, shows that at September 2020 Forward Electronics had debt of NT$759.6m, up from NT$710.0m in one year. However, it does have NT$1.48b in cash offsetting this, leading to net cash of NT$721.6m.

A Look At Forward Electronics's Liabilities

According to the last reported balance sheet, Forward Electronics had liabilities of NT$259.5m due within 12 months, and liabilities of NT$1.08b due beyond 12 months. Offsetting these obligations, it had cash of NT$1.48b as well as receivables valued at NT$226.1m due within 12 months. So it actually has NT$365.5m more liquid assets than total liabilities.

This surplus suggests that Forward Electronics is using debt in a way that is appears to be both safe and conservative. Because it has plenty of assets, it is unlikely to have trouble with its lenders. Succinctly put, Forward Electronics boasts net cash, so it's fair to say it does not have a heavy debt load! When analysing debt levels, the balance sheet is the obvious place to start. But it is Forward Electronics'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.

Over 12 months, Forward Electronics made a loss at the EBIT level, and saw its revenue drop to NT$777m, which is a fall of 32%. That makes us nervous, to say the least.

So How Risky Is Forward Electronics?

Statistically speaking companies that lose money are riskier than those that make money. And we do note that Forward Electronics had an earnings before interest and tax (EBIT) loss, over the last year. And over the same period it saw negative free cash outflow of NT$98m and booked a NT$171m accounting loss. While this does make the company a bit risky, it's important to remember it has net cash of NT$721.6m. That kitty means the company can keep spending for growth for at least two years, at current rates. Overall, its balance sheet doesn't seem overly risky, at the moment, but we're always cautious until we see the positive free cash flow. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. Like risks, for instance. Every company has them, and we've spotted 3 warning signs for Forward Electronics (of which 1 is significant!) you should know about.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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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