Is Green World Fintech Service (GTSM:6763) A Risky Investment?

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.' 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. We note that Green World Fintech Service Co., Ltd. (GTSM:6763) does have debt on its balance sheet. But is this debt a concern to shareholders?

Why Does Debt Bring Risk?

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. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for Green World Fintech Service

What Is Green World Fintech Service's Net Debt?

As you can see below, at the end of December 2020, Green World Fintech Service had NT$150.0m of debt, up from NT$130.0m a year ago. Click the image for more detail. However, its balance sheet shows it holds NT$2.32b in cash, so it actually has NT$2.17b net cash.

How Healthy Is Green World Fintech Service's Balance Sheet?

According to the last reported balance sheet, Green World Fintech Service had liabilities of NT$2.58b due within 12 months, and liabilities of NT$45.4m due beyond 12 months. Offsetting this, it had NT$2.32b in cash and NT$617.5m in receivables that were due within 12 months. So it can boast NT$310.2m more liquid assets than total liabilities.

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

In addition to that, we're happy to report that Green World Fintech Service has boosted its EBIT by 34%, thus reducing the spectre of future debt repayments. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Green World Fintech Service 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 company can only pay off debt with cold hard cash, not accounting profits. While Green World Fintech Service 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 most recent three years, Green World Fintech Service recorded free cash flow worth 72% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This cold hard cash means it can reduce its debt when it wants to.

Summing up

While we empathize with investors who find debt concerning, you should keep in mind that Green World Fintech Service has net cash of NT$2.17b, as well as more liquid assets than liabilities. And it impressed us with its EBIT growth of 34% over the last year. So is Green World Fintech Service'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. Be aware that Green World Fintech Service is showing 1 warning sign in our investment analysis , you should know about...

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.

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