Global Lighting Technologies (TPE:4935) Could Easily Take On More Debt

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 seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. We note that Global Lighting Technologies Inc. (TPE:4935) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

What Risk Does Debt Bring?

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

See our latest analysis for Global Lighting Technologies

What Is Global Lighting Technologies's Net Debt?

You can click the graphic below for the historical numbers, but it shows that Global Lighting Technologies had NT$1.07b of debt in September 2020, down from NT$1.11b, one year before. But it also has NT$3.43b in cash to offset that, meaning it has NT$2.36b net cash.

A Look At Global Lighting Technologies's Liabilities

Zooming in on the latest balance sheet data, we can see that Global Lighting Technologies had liabilities of NT$4.19b due within 12 months and liabilities of NT$807.5m due beyond that. Offsetting this, it had NT$3.43b in cash and NT$2.91b in receivables that were due within 12 months. So it actually has NT$1.35b more liquid assets than total liabilities.

This surplus suggests that Global Lighting Technologies has a conservative balance sheet, and could probably eliminate its debt without much difficulty. 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.

Even more impressive was the fact that Global Lighting Technologies grew its EBIT by 372% over twelve months. That boost will make it even easier to pay down debt going forward. 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 Global Lighting Technologies can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. 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. During the last three years, Global Lighting Technologies generated free cash flow amounting to a very robust 93% of its EBIT, more than we'd expect. That puts it in a very strong position to pay down debt.

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$2.36b, as well as more liquid assets than liabilities. And it impressed us with free cash flow of NT$931m, being 93% of its EBIT. So we don't think Global Lighting Technologies's use of debt is risky. Above most other metrics, we think its important to track how fast earnings per share is growing, if at all. If you've also come to that realization, you're in luck, because today you can view this interactive graph of Global Lighting Technologies's earnings per share history for free.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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