Is Mildex Optical (GTSM:4729) Weighed On By Its Debt Load?

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. We can see that Mildex Optical Inc. (GTSM:4729) does use debt in its business. But should shareholders be worried about its use of debt?

When Is Debt Dangerous?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for Mildex Optical

What Is Mildex Optical's Net Debt?

The image below, which you can click on for greater detail, shows that Mildex Optical had debt of NT$1.72b at the end of September 2020, a reduction from NT$1.94b over a year. On the flip side, it has NT$366.0m in cash leading to net debt of about NT$1.35b.

How Healthy Is Mildex Optical's Balance Sheet?

We can see from the most recent balance sheet that Mildex Optical had liabilities of NT$1.12b falling due within a year, and liabilities of NT$907.9m due beyond that. On the other hand, it had cash of NT$366.0m and NT$205.4m worth of receivables due within a year. So its liabilities total NT$1.46b more than the combination of its cash and short-term receivables.

When you consider that this deficiency exceeds the company's NT$1.25b market capitalization, you might well be inclined to review the balance sheet intently. In the scenario where the company had to clean up its balance sheet quickly, it seems likely shareholders would suffer extensive dilution. When analysing debt levels, the balance sheet is the obvious place to start. But it is Mildex Optical'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.

In the last year Mildex Optical had a loss before interest and tax, and actually shrunk its revenue by 2.9%, to NT$983m. We would much prefer see growth.

Caveat Emptor

Importantly, Mildex Optical had an earnings before interest and tax (EBIT) loss over the last year. To be specific the EBIT loss came in at NT$84m. Considering that alongside the liabilities mentioned above make us nervous about the company. We'd want to see some strong near-term improvements before getting too interested in the stock. For example, we would not want to see a repeat of last year's loss of NT$54m. In the meantime, we consider the stock to be 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. For instance, we've identified 2 warning signs for Mildex Optical (1 doesn't sit too well with us) 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.
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