We Think Dynapack International Technology (GTSM:3211) Can Manage Its Debt With Ease

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 might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. As with many other companies Dynapack International Technology Corporation (GTSM:3211) makes use of debt. But is this debt a concern to shareholders?

When Is Debt A Problem?

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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for Dynapack International Technology

How Much Debt Does Dynapack International Technology Carry?

You can click the graphic below for the historical numbers, but it shows that Dynapack International Technology had NT$4.88b of debt in September 2020, down from NT$5.19b, one year before. But on the other hand it also has NT$5.50b in cash, leading to a NT$621.9m net cash position.

How Strong Is Dynapack International Technology's Balance Sheet?

We can see from the most recent balance sheet that Dynapack International Technology had liabilities of NT$7.31b falling due within a year, and liabilities of NT$4.48b due beyond that. Offsetting this, it had NT$5.50b in cash and NT$4.72b in receivables that were due within 12 months. So it has liabilities totalling NT$1.57b more than its cash and near-term receivables, combined.

Of course, Dynapack International Technology has a market capitalization of NT$12.6b, so these liabilities are probably manageable. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. While it does have liabilities worth noting, Dynapack International Technology also has more cash than debt, so we're pretty confident it can manage its debt safely.

In addition to that, we're happy to report that Dynapack International Technology has boosted its EBIT by 41%, thus reducing the spectre of future debt repayments. 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. Dynapack International 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. Over the last three years, Dynapack International Technology 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 Dynapack International Technology does have more liabilities than liquid assets, it also has net cash of NT$621.9m. And it impressed us with free cash flow of NT$1.9b, being 116% of its EBIT. So is Dynapack International Technology's debt a risk? It doesn't seem so to us. 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. Be aware that Dynapack International Technology is showing 2 warning signs in our investment analysis , you should know about...

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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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