Wistron Information Technology & Services (GTSM:4953) 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.' 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 Wistron Information Technology & Services Corporation (GTSM:4953) does have debt on its balance sheet. But is this debt a concern to shareholders?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

Check out our latest analysis for Wistron Information Technology & Services

How Much Debt Does Wistron Information Technology & Services Carry?

As you can see below, Wistron Information Technology & Services had NT$92.1m of debt at September 2020, down from NT$224.8m a year prior. But it also has NT$660.9m in cash to offset that, meaning it has NT$568.7m net cash.

A Look At Wistron Information Technology & Services' Liabilities

We can see from the most recent balance sheet that Wistron Information Technology & Services had liabilities of NT$893.3m falling due within a year, and liabilities of NT$200.3m due beyond that. Offsetting these obligations, it had cash of NT$660.9m as well as receivables valued at NT$1.69b due within 12 months. So it can boast NT$1.26b more liquid assets than total liabilities.

This surplus suggests that Wistron Information Technology & Services 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. Simply put, the fact that Wistron Information Technology & Services has more cash than debt is arguably a good indication that it can manage its debt safely.

Also good is that Wistron Information Technology & Services grew its EBIT at 16% over the last year, further increasing its ability to manage debt. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Wistron Information Technology & Services's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. While Wistron Information Technology & Services 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. In the last three years, Wistron Information Technology & Services created free cash flow amounting to 7.0% of its EBIT, an uninspiring performance. For us, cash conversion that low sparks a little paranoia about is ability to extinguish debt.

Summing up

While we empathize with investors who find debt concerning, you should keep in mind that Wistron Information Technology & Services has net cash of NT$568.7m, as well as more liquid assets than liabilities. And it impressed us with its EBIT growth of 16% over the last year. So is Wistron Information Technology & Services's debt a risk? It doesn't seem so to us. 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 Wistron Information Technology & Services .

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

If you decide to trade Wistron Information Technology & Services, use the lowest-cost* platform that is rated #1 Overall by Barron’s, Interactive Brokers. Trade stocks, options, futures, forex, bonds and funds on 135 markets, all 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.