Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. We note that DataVan International Corporation (GTSM:3521) does have debt on its balance sheet. But is this debt a concern to shareholders?
When Is Debt Dangerous?
Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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.
View our latest analysis for DataVan International
What Is DataVan International's Net Debt?
The chart below, which you can click on for greater detail, shows that DataVan International had NT$601.3m in debt in September 2020; about the same as the year before. However, it also had NT$67.7m in cash, and so its net debt is NT$533.6m.
A Look At DataVan International's Liabilities
The latest balance sheet data shows that DataVan International had liabilities of NT$541.1m due within a year, and liabilities of NT$132.0m falling due after that. Offsetting these obligations, it had cash of NT$67.7m as well as receivables valued at NT$53.4m due within 12 months. So it has liabilities totalling NT$552.0m more than its cash and near-term receivables, combined.
This deficit is considerable relative to its market capitalization of NT$866.9m, so it does suggest shareholders should keep an eye on DataVan International's use of debt. Should its lenders demand that it shore up the balance sheet, shareholders would likely face severe dilution. 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 DataVan International 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.
Over 12 months, DataVan International made a loss at the EBIT level, and saw its revenue drop to NT$427m, which is a fall of 69%. That makes us nervous, to say the least.
Caveat Emptor
Not only did DataVan International's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). To be specific the EBIT loss came in at NT$42m. 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. So we think its balance sheet is a little strained, though not beyond repair. Another cause for caution is that is bled NT$3.7m in negative free cash flow over the last twelve months. So suffice it to say we do consider the stock to be 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. Consider risks, for instance. Every company has them, and we've spotted 2 warning signs for DataVan International you should know about.
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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About TPEX:3521
Excellent balance sheet low.
