Chen Full International (GTSM:8383) Has A Rock Solid 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 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 can see that Chen Full International Co., Ltd. (GTSM:8383) does use debt in its business. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. 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 step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for Chen Full International

What Is Chen Full International's Net Debt?

As you can see below, Chen Full International had NT$100.0m of debt at September 2020, down from NT$280.0m a year prior. However, its balance sheet shows it holds NT$683.0m in cash, so it actually has NT$583.0m net cash.

How Healthy Is Chen Full International's Balance Sheet?

We can see from the most recent balance sheet that Chen Full International had liabilities of NT$1.20b falling due within a year, and liabilities of NT$173.5m due beyond that. On the other hand, it had cash of NT$683.0m and NT$1.02b worth of receivables due within a year. So it actually has NT$324.6m more liquid assets than total liabilities.

This surplus suggests that Chen Full International has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Simply put, the fact that Chen Full International has more cash than debt is arguably a good indication that it can manage its debt safely.

On top of that, Chen Full International grew its EBIT by 31% over the last twelve months, and that growth will make it easier to handle its debt. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if Chen Full International can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. While Chen Full International 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 most recent three years, Chen Full International recorded free cash flow worth 62% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This free cash flow puts the company in a good position to pay down debt, when appropriate.

Summing up

While it is always sensible to investigate a company's debt, in this case Chen Full International has NT$583.0m in net cash and a decent-looking balance sheet. And we liked the look of last year's 31% year-on-year EBIT growth. So we don't think Chen Full International's use of debt is risky. 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. Case in point: We've spotted 2 warning signs for Chen Full International you should be aware of, and 1 of them doesn't sit too well with us.

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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