HEP Tech (GTSM:3609) Has Debt But No Earnings; Should You Worry?

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.' 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. As with many other companies HEP Tech Co., Ltd. (GTSM:3609) makes use of debt. But the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

View our latest analysis for HEP Tech

What Is HEP Tech's Debt?

You can click the graphic below for the historical numbers, but it shows that HEP Tech had NT$108.6m of debt in September 2020, down from NT$118.7m, one year before. However, it does have NT$330.8m in cash offsetting this, leading to net cash of NT$222.2m.

How Healthy Is HEP Tech's Balance Sheet?

We can see from the most recent balance sheet that HEP Tech had liabilities of NT$230.1m falling due within a year, and liabilities of NT$2.51m due beyond that. Offsetting this, it had NT$330.8m in cash and NT$64.3m in receivables that were due within 12 months. So it actually has NT$162.5m more liquid assets than total liabilities.

It's good to see that HEP Tech has plenty of liquidity on its balance sheet, suggesting conservative management of liabilities. Given it has easily adequate short term liquidity, we don't think it will have any issues with its lenders. Simply put, the fact that HEP Tech has more cash than debt is arguably a good indication that it can manage its debt safely. The balance sheet is clearly the area to focus on when you are analysing debt. But it is HEP Tech's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Over 12 months, HEP Tech made a loss at the EBIT level, and saw its revenue drop to NT$483m, which is a fall of 16%. That's not what we would hope to see.

So How Risky Is HEP Tech?

Although HEP Tech had an earnings before interest and tax (EBIT) loss over the last twelve months, it generated positive free cash flow of NT$20m. So taking that on face value, and considering the net cash situation, we don't think that the stock is too risky in the near term. We'll feel more comfortable with the stock once EBIT is positive, given the lacklustre revenue growth. 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. For instance, we've identified 1 warning sign for HEP Tech that you should be aware of.

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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