Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. We note that Ways Technical Corp., Ltd. (GTSM:3508) does have debt on its balance sheet. But is this debt a concern to shareholders?
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. 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, plenty of companies use debt to fund growth, without any negative consequences. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.
What Is Ways Technical's Net Debt?
The image below, which you can click on for greater detail, shows that at December 2020 Ways Technical had debt of NT$626.0m, up from NT$69.9m in one year. But it also has NT$769.1m in cash to offset that, meaning it has NT$143.1m net cash.
How Strong Is Ways Technical's Balance Sheet?
The latest balance sheet data shows that Ways Technical had liabilities of NT$1.47b due within a year, and liabilities of NT$653.5m falling due after that. Offsetting this, it had NT$769.1m in cash and NT$281.4m in receivables that were due within 12 months. So its liabilities total NT$1.07b more than the combination of its cash and short-term receivables.
This deficit isn't so bad because Ways Technical is worth NT$2.57b, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. However, it is still worthwhile taking a close look at its ability to pay off debt. Despite its noteworthy liabilities, Ways Technical boasts net cash, so it's fair to say it does not have a heavy debt load! The balance sheet is clearly the area to focus on when you are analysing debt. But it is Ways Technical'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.
Over 12 months, Ways Technical made a loss at the EBIT level, and saw its revenue drop to NT$934m, which is a fall of 8.1%. We would much prefer see growth.
So How Risky Is Ways Technical?
Statistically speaking companies that lose money are riskier than those that make money. And we do note that Ways Technical had an earnings before interest and tax (EBIT) loss, over the last year. Indeed, in that time it burnt through NT$781m of cash and made a loss of NT$166m. But the saving grace is the NT$143.1m on the balance sheet. That kitty means the company can keep spending for growth for at least two years, at current rates. Overall, we'd say the stock is a bit risky, and we're usually very cautious until we see positive free cash flow. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. We've identified 2 warning signs with Ways Technical , and understanding them should be part of your investment process.
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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