Is ANT Precision Industry (GTSM:3646) A Risky Investment?

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 ANT Precision Industry Co., Ltd. (GTSM:3646) does use debt in its business. But the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

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 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, debt can be an important tool in businesses, particularly capital heavy businesses. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for ANT Precision Industry

What Is ANT Precision Industry's Net Debt?

The image below, which you can click on for greater detail, shows that at September 2020 ANT Precision Industry had debt of NT$100.0m, up from NT$61.0m in one year. But on the other hand it also has NT$221.3m in cash, leading to a NT$121.3m net cash position.

How Strong Is ANT Precision Industry's Balance Sheet?

According to the last reported balance sheet, ANT Precision Industry had liabilities of NT$225.2m due within 12 months, and liabilities of NT$15.0m due beyond 12 months. On the other hand, it had cash of NT$221.3m and NT$146.9m worth of receivables due within a year. So it can boast NT$127.9m more liquid assets than total liabilities.

This excess liquidity suggests that ANT Precision Industry is taking a careful approach to debt. Due to its strong net asset position, it is not likely to face issues with its lenders. Succinctly put, ANT Precision Industry boasts net cash, so it's fair to say it does not have a heavy debt load!

Better yet, ANT Precision Industry grew its EBIT by 117% last year, which is an impressive improvement. If maintained that growth will make the debt even more manageable in the years ahead. There's no doubt that we learn most about debt from the balance sheet. But it is ANT Precision Industry'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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. ANT Precision Industry 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. Looking at the most recent three years, ANT Precision Industry recorded free cash flow of 28% of its EBIT, which is weaker than we'd expect. That weak cash conversion makes it more difficult to handle indebtedness.

Summing up

While it is always sensible to investigate a company's debt, in this case ANT Precision Industry has NT$121.3m in net cash and a decent-looking balance sheet. And it impressed us with its EBIT growth of 117% over the last year. So we don't think ANT Precision Industry's use of debt is risky. 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. Case in point: We've spotted 2 warning signs for ANT Precision Industry you should be aware of.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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