Feedback Technology (GTSM:8091) Seems To Use Debt Quite Sensibly

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.' 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. Importantly, Feedback Technology Corp. (GTSM:8091) does carry debt. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

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 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 think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for Feedback Technology

How Much Debt Does Feedback Technology Carry?

The image below, which you can click on for greater detail, shows that at September 2020 Feedback Technology had debt of NT$185.1m, up from NT$80.0m in one year. However, it does have NT$807.0m in cash offsetting this, leading to net cash of NT$621.9m.

How Strong Is Feedback Technology's Balance Sheet?

We can see from the most recent balance sheet that Feedback Technology had liabilities of NT$254.0m falling due within a year, and liabilities of NT$195.2m due beyond that. On the other hand, it had cash of NT$807.0m and NT$249.1m worth of receivables due within a year. So it actually has NT$607.0m more liquid assets than total liabilities.

This surplus suggests that Feedback Technology is using debt in a way that is appears to be both safe and conservative. Due to its strong net asset position, it is not likely to face issues with its lenders. Succinctly put, Feedback Technology boasts net cash, so it's fair to say it does not have a heavy debt load!

The good news is that Feedback Technology has increased its EBIT by 8.0% over twelve months, which should ease any concerns about debt repayment. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Feedback Technology 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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. While Feedback Technology 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. Over the last three years, Feedback Technology saw substantial negative free cash flow, in total. While investors are no doubt expecting a reversal of that situation in due course, it clearly does mean its use of debt is more risky.

Summing up

While we empathize with investors who find debt concerning, you should keep in mind that Feedback Technology has net cash of NT$621.9m, as well as more liquid assets than liabilities. And it also grew its EBIT by 8.0% over the last year. So we don't have any problem with Feedback Technology's use of debt. 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. For example, we've discovered 2 warning signs for Feedback Technology (1 is a bit unpleasant!) that you should be aware of before investing here.

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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