Is Hyweb Technology (GTSM:5212) A Risky Investment?

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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, Hyweb Technology Co., Ltd. (GTSM:5212) does carry debt. But the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

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 usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. 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 Hyweb Technology

What Is Hyweb Technology's Debt?

The image below, which you can click on for greater detail, shows that at September 2020 Hyweb Technology had debt of NT$90.5m, up from NT$83.3m in one year. However, its balance sheet shows it holds NT$325.8m in cash, so it actually has NT$235.4m net cash.

How Healthy Is Hyweb Technology's Balance Sheet?

According to the last reported balance sheet, Hyweb Technology had liabilities of NT$280.5m due within 12 months, and liabilities of NT$45.9m due beyond 12 months. Offsetting this, it had NT$325.8m in cash and NT$265.8m in receivables that were due within 12 months. So it can boast NT$265.2m more liquid assets than total liabilities.

This surplus suggests that Hyweb Technology has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, Hyweb Technology boasts net cash, so it's fair to say it does not have a heavy debt load!

Fortunately, Hyweb Technology grew its EBIT by 7.3% in the last year, making that debt load look even more manageable. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Hyweb Technology's earnings that will influence how the balance sheet holds up in the future. 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.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. Hyweb Technology may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. Happily for any shareholders, Hyweb Technology actually produced more free cash flow than EBIT over the last three years. There's nothing better than incoming cash when it comes to staying in your lenders' good graces.

Summing up

While it is always sensible to investigate a company's debt, in this case Hyweb Technology has NT$235.4m in net cash and a decent-looking balance sheet. And it impressed us with free cash flow of NT$237m, being 134% of its EBIT. So is Hyweb Technology's debt a risk? It doesn't seem so to us. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. These risks can be hard to spot. Every company has them, and we've spotted 2 warning signs for Hyweb Technology you should know about.

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.

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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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