Does Global Lighting Technologies (TPE:4935) Have A 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. As with many other companies Global Lighting Technologies Inc. (TPE:4935) makes use of debt. But the more important question is: how much risk is that debt creating?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for Global Lighting Technologies

What Is Global Lighting Technologies's Debt?

You can click the graphic below for the historical numbers, but it shows that Global Lighting Technologies had NT$1.08b of debt in December 2020, down from NT$1.15b, one year before. But on the other hand it also has NT$4.17b in cash, leading to a NT$3.08b net cash position.

How Healthy Is Global Lighting Technologies' Balance Sheet?

We can see from the most recent balance sheet that Global Lighting Technologies had liabilities of NT$4.38b falling due within a year, and liabilities of NT$810.4m due beyond that. On the other hand, it had cash of NT$4.17b and NT$2.86b worth of receivables due within a year. So it can boast NT$1.84b more liquid assets than total liabilities.

This short term liquidity is a sign that Global Lighting Technologies could probably pay off its debt with ease, as its balance sheet is far from stretched. Simply put, the fact that Global Lighting Technologies has more cash than debt is arguably a good indication that it can manage its debt safely.

Better yet, Global Lighting Technologies grew its EBIT by 375% last year, which is an impressive improvement. That boost will make it even easier to pay down debt going forward. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine Global Lighting Technologies's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. While Global Lighting Technologies 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, Global Lighting Technologies actually produced more free cash flow than EBIT. That sort of strong cash generation warms our hearts like a puppy in a bumblebee suit.

Summing up

While we empathize with investors who find debt concerning, you should keep in mind that Global Lighting Technologies has net cash of NT$3.08b, as well as more liquid assets than liabilities. The cherry on top was that in converted 118% of that EBIT to free cash flow, bringing in NT$1.6b. So we don't think Global Lighting Technologies'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. To that end, you should be aware of the 1 warning sign we've spotted with Global Lighting Technologies .

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.

If you’re looking to trade Global Lighting Technologies, open an account with the lowest-cost* platform trusted by professionals, Interactive Brokers. Their clients from over 200 countries and territories trade stocks, options, futures, forex, bonds and funds worldwide from a single integrated account. Promoted

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.
^*Interactive Brokers Rated Lowest Cost Broker by StockBrokers.com Annual Online Review 2020

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.