Is Bison Electronics (GTSM:3659) Using Too Much Debt?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. Importantly, Bison Electronics Inc. (GTSM:3659) does carry debt. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for Bison Electronics

What Is Bison Electronics's Debt?

As you can see below, Bison Electronics had NT$151.7m of debt at June 2020, down from NT$193.3m a year prior. But on the other hand it also has NT$294.9m in cash, leading to a NT$143.2m net cash position.

How Healthy Is Bison Electronics's Balance Sheet?

We can see from the most recent balance sheet that Bison Electronics had liabilities of NT$575.7m falling due within a year, and liabilities of NT$163.0m due beyond that. Offsetting these obligations, it had cash of NT$294.9m as well as receivables valued at NT$392.4m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by NT$51.4m.

Since publicly traded Bison Electronics shares are worth a total of NT$664.2m, it seems unlikely that this level of liabilities would be a major threat. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. Despite its noteworthy liabilities, Bison Electronics boasts net cash, so it's fair to say it does not have a heavy debt load!

Better yet, Bison Electronics grew its EBIT by 103% last year, which is an impressive improvement. That boost will make it even easier to pay down debt going forward. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Bison Electronics'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. While Bison Electronics 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. During the last three years, Bison Electronics produced sturdy free cash flow equating to 55% 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

While it is always sensible to look at a company's total liabilities, it is very reassuring that Bison Electronics has NT$143.2m in net cash. And we liked the look of last year's 103% year-on-year EBIT growth. So we don't think Bison Electronics'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. Take risks, for example - Bison Electronics has 2 warning signs we think you should be aware of.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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