Viking Tech (GTSM:3624) Seems To Use Debt Quite Sensibly

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. Importantly, Viking Tech Corporation (GTSM:3624) does carry debt. But the more important question is: how much risk is that debt creating?

What Risk Does Debt Bring?

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 usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for Viking Tech

How Much Debt Does Viking Tech Carry?

As you can see below, Viking Tech had NT$160.2m of debt at September 2020, down from NT$202.8m a year prior. But it also has NT$710.9m in cash to offset that, meaning it has NT$550.6m net cash.

How Healthy Is Viking Tech's Balance Sheet?

The latest balance sheet data shows that Viking Tech had liabilities of NT$435.8m due within a year, and liabilities of NT$143.1m falling due after that. Offsetting this, it had NT$710.9m in cash and NT$500.4m in receivables that were due within 12 months. So it can boast NT$632.4m more liquid assets than total liabilities.

It's good to see that Viking Tech has plenty of liquidity on its balance sheet, suggesting conservative management of liabilities. Because it has plenty of assets, it is unlikely to have trouble with its lenders. Succinctly put, Viking Tech boasts net cash, so it's fair to say it does not have a heavy debt load!

The modesty of its debt load may become crucial for Viking Tech if management cannot prevent a repeat of the 60% cut to EBIT over the last year. When it comes to paying off debt, falling earnings are no more useful than sugary sodas are for your health. 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 Viking Tech 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.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While Viking Tech has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. Looking at the most recent three years, Viking Tech recorded free cash flow of 35% of its EBIT, which is weaker than we'd expect. That's not great, when it comes to paying down debt.

Summing up

While we empathize with investors who find debt concerning, you should keep in mind that Viking Tech has net cash of NT$550.6m, as well as more liquid assets than liabilities. So we don't have any problem with Viking Tech's use of debt. 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. For example, we've discovered 2 warning signs for Viking Tech that you should be aware of before investing here.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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