We Think Partner Tech (GTSM:3097) Has A Fair Chunk Of Debt

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says '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, Partner Tech Corp. (GTSM:3097) does carry debt. But the more important question is: how much risk is that debt creating?

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. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest 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 Partner Tech

How Much Debt Does Partner Tech Carry?

The image below, which you can click on for greater detail, shows that Partner Tech had debt of NT$431.9m at the end of June 2020, a reduction from NT$530.9m over a year. However, it does have NT$313.7m in cash offsetting this, leading to net debt of about NT$118.1m.

How Strong Is Partner Tech's Balance Sheet?

The latest balance sheet data shows that Partner Tech had liabilities of NT$797.9m due within a year, and liabilities of NT$308.2m falling due after that. Offsetting these obligations, it had cash of NT$313.7m as well as receivables valued at NT$399.5m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by NT$392.9m.

While this might seem like a lot, it is not so bad since Partner Tech has a market capitalization of NT$1.23b, and so it could probably strengthen its balance sheet by raising capital if it needed to. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Partner Tech 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.

In the last year Partner Tech wasn't profitable at an EBIT level, but managed to grow its revenue by 7.2%, to NT$3.0b. We usually like to see faster growth from unprofitable companies, but each to their own.

Caveat Emptor

Importantly, Partner Tech had an earnings before interest and tax (EBIT) loss over the last year. Indeed, it lost NT$9.4m at the EBIT level. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. For example, we would not want to see a repeat of last year's loss of NT$29m. In the meantime, we consider the stock very 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. To that end, you should learn about the 4 warning signs we've spotted with Partner Tech (including 1 which is makes us a bit uncomfortable) .

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.

If you decide to trade Partner Tech, 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@simplywallst.com.