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 can see that Ways Technical Corp., Ltd. (GTSM:3508) does use debt in its business. But should shareholders be worried about its use of debt?
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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. When we think about a company's use of debt, we first look at 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 September 2020 Ways Technical had debt of NT$651.4m, up from NT$73.5m in one year. But it also has NT$672.0m in cash to offset that, meaning it has NT$20.6m net cash.
A Look At Ways Technical's Liabilities
According to the last reported balance sheet, Ways Technical had liabilities of NT$1.46b due within 12 months, and liabilities of NT$658.7m due beyond 12 months. Offsetting these obligations, it had cash of NT$672.0m as well as receivables valued at NT$273.7m due within 12 months. So it has liabilities totalling NT$1.17b more than its cash and near-term receivables, combined.
This deficit isn't so bad because Ways Technical is worth NT$2.61b, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. 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 you can't view debt in total isolation; since Ways Technical will need earnings to service that debt. 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.
In the last year Ways Technical's revenue was pretty flat, and it made a negative EBIT. While that's not too bad, we'd prefer see growth.
So How Risky Is Ways Technical?
By their very nature companies that are losing money are more risky than those with a long history of profitability. 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$831m of cash and made a loss of NT$206m. But the saving grace is the NT$20.6m on the balance sheet. That means it could keep spending at its current rate for more than two years. Summing up, we're a little skeptical of this one, as it seems fairly risky in the absence of free cashflow. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. For example, we've discovered 3 warning signs for Ways Technical that you should be aware of before investing here.
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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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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