Is Dynapack International Technology (GTSM:3211) Using Too Much Debt?

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' 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 Dynapack International Technology Corporation (GTSM:3211) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

When Is Debt A Problem?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. If things get really bad, the lenders can take control of the business. 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, 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.

Check out our latest analysis for Dynapack International Technology

What Is Dynapack International Technology's Debt?

The image below, which you can click on for greater detail, shows that at December 2020 Dynapack International Technology had debt of NT$5.07b, up from NT$4.64b in one year. However, its balance sheet shows it holds NT$5.36b in cash, so it actually has NT$288.2m net cash.

How Strong Is Dynapack International Technology's Balance Sheet?

The latest balance sheet data shows that Dynapack International Technology had liabilities of NT$6.88b due within a year, and liabilities of NT$4.54b falling due after that. On the other hand, it had cash of NT$5.36b and NT$4.50b worth of receivables due within a year. So its liabilities total NT$1.57b more than the combination of its cash and short-term receivables.

Of course, Dynapack International Technology has a market capitalization of NT$18.0b, so these liabilities are probably manageable. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. Despite its noteworthy liabilities, Dynapack International Technology boasts net cash, so it's fair to say it does not have a heavy debt load!

On top of that, Dynapack International Technology grew its EBIT by 52% over the last twelve months, and that growth will make it easier to handle its debt. When analysing debt levels, the balance sheet is the obvious place to start. But it is Dynapack International 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, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While Dynapack International Technology 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, Dynapack International Technology recorded free cash flow worth a fulsome 85% of its EBIT, which is stronger than we'd usually expect. That puts it in a very strong position to pay down debt.

Summing up

While it is always sensible to look at a company's total liabilities, it is very reassuring that Dynapack International Technology has NT$288.2m in net cash. And it impressed us with free cash flow of NT$844m, being 85% of its EBIT. So we don't think Dynapack International Technology's use of debt is risky. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. For example, we've discovered 3 warning signs for Dynapack International Technology that you should be aware of before investing here.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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