These 4 Measures Indicate That Information Technology Total Services (GTSM:6697) Is Using Debt Safely

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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. Importantly, Information Technology Total Services Co., Ltd (GTSM:6697) does carry debt. But the real question is whether this debt is making the company risky.

When Is Debt A Problem?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. 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. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for Information Technology Total Services

What Is Information Technology Total Services's Net Debt?

You can click the graphic below for the historical numbers, but it shows that Information Technology Total Services had NT$80.0m of debt in September 2020, down from NT$236.9m, one year before. But it also has NT$81.9m in cash to offset that, meaning it has NT$1.94m net cash.

How Strong Is Information Technology Total Services' Balance Sheet?

According to the last reported balance sheet, Information Technology Total Services had liabilities of NT$218.2m due within 12 months, and liabilities of NT$95.6m due beyond 12 months. Offsetting these obligations, it had cash of NT$81.9m as well as receivables valued at NT$398.4m due within 12 months. So it can boast NT$166.7m more liquid assets than total liabilities.

This excess liquidity suggests that Information Technology Total Services is taking a careful approach to debt. Due to its strong net asset position, it is not likely to face issues with its lenders. Simply put, the fact that Information Technology Total Services has more cash than debt is arguably a good indication that it can manage its debt safely.

Fortunately, Information Technology Total Services grew its EBIT by 6.5% 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 you can't view debt in total isolation; since Information Technology Total Services will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. While Information Technology Total 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. Over the last three years, Information Technology Total Services 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 it is always sensible to investigate a company's debt, in this case Information Technology Total Services has NT$1.94m in net cash and a decent-looking balance sheet. The cherry on top was that in converted 127% of that EBIT to free cash flow, bringing in NT$110m. So we don't think Information Technology Total Services'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. For example, we've discovered 2 warning signs for Information Technology Total Services that you should be aware of before investing here.

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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