Is Ushine Photonics (GTSM:3678) A Risky Investment?

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 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. As with many other companies Ushine Photonics Corporation (GTSM:3678) makes use of debt. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for Ushine Photonics

What Is Ushine Photonics's Net Debt?

The image below, which you can click on for greater detail, shows that at June 2020 Ushine Photonics had debt of NT$258.9m, up from NT$187.7m in one year. However, it also had NT$71.5m in cash, and so its net debt is NT$187.4m.

How Strong Is Ushine Photonics's Balance Sheet?

We can see from the most recent balance sheet that Ushine Photonics had liabilities of NT$63.8m falling due within a year, and liabilities of NT$221.2m due beyond that. Offsetting this, it had NT$71.5m in cash and NT$54.5m in receivables that were due within 12 months. So it has liabilities totalling NT$159.0m more than its cash and near-term receivables, combined.

This deficit is considerable relative to its market capitalization of NT$184.8m, so it does suggest shareholders should keep an eye on Ushine Photonics's use of debt. Should its lenders demand that it shore up the balance sheet, shareholders would likely face severe dilution. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Ushine Photonics'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.

Over 12 months, Ushine Photonics reported revenue of NT$191m, which is a gain of 12%, although it did not report any earnings before interest and tax. That rate of growth is a bit slow for our taste, but it takes all types to make a world.

Caveat Emptor

Over the last twelve months Ushine Photonics produced an earnings before interest and tax (EBIT) loss. Indeed, it lost NT$124k at the EBIT level. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. So we think its balance sheet is a little strained, though not beyond repair. However, it doesn't help that it burned through NT$30m of cash over the last year. So suffice it to say we consider the stock very risky. 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. Consider risks, for instance. Every company has them, and we've spotted 2 warning signs for Ushine Photonics you should know about.

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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