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.' 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 can see that DataVan International Corporation (GTSM:3521) does use debt in its business. 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. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. 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 Debt?
The image below, which you can click on for greater detail, shows that DataVan International had debt of NT$565.1m at the end of December 2020, a reduction from NT$608.6m over a year. On the flip side, it has NT$52.0m in cash leading to net debt of about NT$513.1m.
A Look At DataVan International's Liabilities
According to the last reported balance sheet, DataVan International had liabilities of NT$355.9m due within 12 months, and liabilities of NT$287.2m due beyond 12 months. On the other hand, it had cash of NT$52.0m and NT$42.9m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by NT$548.2m.
This deficit is considerable relative to its market capitalization of NT$708.0m, so it does suggest shareholders should keep an eye on DataVan International's use of debt. This suggests shareholders would be heavily diluted if the company needed to shore up its balance sheet in a hurry. When analysing debt levels, the balance sheet is the obvious place to start. But it is DataVan International'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, DataVan International made a loss at the EBIT level, and saw its revenue drop to NT$317m, which is a fall of 78%. That makes us nervous, to say the least.
Caveat Emptor
While DataVan International's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. To be specific the EBIT loss came in at NT$46m. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. So we think its balance sheet is a little strained, though not beyond repair. We would feel better if it turned its trailing twelve month loss of NT$42m into a profit. So in short it's a really risky stock. 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 DataVan International is showing 1 warning sign in our investment analysis , you should know about...
If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.
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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 very low.
