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. We note that ANT Precision Industry Co., Ltd. (GTSM:3646) does have debt on its balance sheet. But should shareholders be worried about its use of debt?
What Risk Does Debt Bring?
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. Part and parcel of capitalism is the process of ‘creative destruction’ where failed businesses are mercilessly liquidated by their bankers. 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. Having said that, the most common situation is where a company manages its debt reasonably well – and to its own advantage. The first thing to do when considering how much debt a business uses is to look at 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 March 2020 ANT Precision Industry had debt of NT$100.0m, up from NT$21.5m in one year. However, it does have NT$246.0m in cash offsetting this, leading to net cash of NT$146.0m.
How Healthy Is ANT Precision Industry’s Balance Sheet?
We can see from the most recent balance sheet that ANT Precision Industry had liabilities of NT$197.7m falling due within a year, and liabilities of NT$4.70m due beyond that. On the other hand, it had cash of NT$246.0m and NT$111.2m worth of receivables due within a year. So it actually has NT$154.8m more liquid assets than total liabilities.
It’s good to see that ANT Precision Industry 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, ANT Precision Industry boasts net cash, so it’s fair to say it does not have a heavy debt load!
On top of that, ANT Precision Industry grew its EBIT by 60% over the last twelve months, and that growth will make it easier to handle its debt. When analysing debt levels, the balance sheet is the obvious place to start. But it is ANT Precision Industry’s earnings that will influence how the balance sheet holds up in the future. 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.
Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While ANT Precision Industry 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. Over the last three years, ANT Precision Industry reported free cash flow worth 6.6% of its EBIT, which is really quite low. That limp level of cash conversion undermines its ability to manage and pay down debt.
Summing up
While we empathize with investors who find debt concerning, you should keep in mind that ANT Precision Industry has net cash of NT$146.0m, as well as more liquid assets than liabilities. And we liked the look of last year’s 60% year-on-year EBIT growth. So we don’t think ANT Precision Industry’s use of debt is risky. There’s no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet – far from it. Case in point: We’ve spotted 2 warning signs for ANT Precision Industry you should be aware of.
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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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. Thank you for reading.