Is Thermaltake Technology (GTSM:3540) Using Too Much Debt?

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' 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. As with many other companies Thermaltake Technology Co., Ltd. (GTSM:3540) makes use of debt. 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. 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. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for Thermaltake Technology

What Is Thermaltake Technology's Debt?

The chart below, which you can click on for greater detail, shows that Thermaltake Technology had NT$974.1m in debt in September 2020; about the same as the year before. However, it does have NT$1.19b in cash offsetting this, leading to net cash of NT$220.2m.

How Healthy Is Thermaltake Technology's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Thermaltake Technology had liabilities of NT$2.38b due within 12 months and liabilities of NT$355.8m due beyond that. Offsetting this, it had NT$1.19b in cash and NT$1.36b in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by NT$175.7m.

Since publicly traded Thermaltake Technology shares are worth a total of NT$4.01b, it seems unlikely that this level of liabilities would be a major threat. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. Despite its noteworthy liabilities, Thermaltake Technology boasts net cash, so it's fair to say it does not have a heavy debt load!

Even more impressive was the fact that Thermaltake Technology grew its EBIT by 484% over twelve months. That boost will make it even easier to pay down debt going forward. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if Thermaltake Technology can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. Thermaltake Technology may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. During the last three years, Thermaltake Technology produced sturdy free cash flow equating to 61% of its EBIT, about what we'd expect. This free cash flow puts the company in a good position to pay down debt, when appropriate.

Summing up

We could understand if investors are concerned about Thermaltake Technology's liabilities, but we can be reassured by the fact it has has net cash of NT$220.2m. And we liked the look of last year's 484% year-on-year EBIT growth. So we don't think Thermaltake Technology's use of debt is risky. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. Consider for instance, the ever-present spectre of investment risk. We've identified 1 warning sign with Thermaltake Technology , and understanding them should be part of your investment process.

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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