Here's Why EFUN Technology (GTSM:3523) Can Afford Some Debt

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 EFUN Technology Co., Ltd. (GTSM:3523) does use debt in its business. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

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. 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.

Check out our latest analysis for EFUN Technology

How Much Debt Does EFUN Technology Carry?

The image below, which you can click on for greater detail, shows that at September 2020 EFUN Technology had debt of NT$610.6m, up from NT$231.4m in one year. However, it also had NT$162.8m in cash, and so its net debt is NT$447.8m.

How Strong Is EFUN Technology's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that EFUN Technology had liabilities of NT$350.8m due within 12 months and liabilities of NT$350.3m due beyond that. On the other hand, it had cash of NT$162.8m and NT$87.2m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by NT$451.0m.

EFUN Technology has a market capitalization of NT$1.24b, so it could very likely raise cash to ameliorate 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. 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 EFUN Technology 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.

Over 12 months, EFUN Technology reported revenue of NT$248m, which is a gain of 271%, although it did not report any earnings before interest and tax. When it comes to revenue growth, that's like nailing the game winning 3-pointer!

Caveat Emptor

While we can certainly appreciate EFUN Technology's revenue growth, its earnings before interest and tax (EBIT) loss is not ideal. Indeed, it lost NT$67m at the EBIT level. 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. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. Another cause for caution is that is bled NT$96m in negative free cash flow over the last twelve months. So suffice it to say we consider the stock very risky. 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 2 warning signs for EFUN Technology that you should be aware of before investing here.

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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