Does New Era Electronics (GTSM:4909) Have A Healthy Balance Sheet?

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 New Era Electronics Co., Ltd (GTSM:4909) does use debt in its business. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

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. If things get really bad, the lenders can take control of the business. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for New Era Electronics

How Much Debt Does New Era Electronics Carry?

As you can see below, New Era Electronics had NT$100.0m of debt, at September 2020, which is about the same as the year before. You can click the chart for greater detail. However, it does have NT$1.55b in cash offsetting this, leading to net cash of NT$1.45b.

How Healthy Is New Era Electronics' Balance Sheet?

We can see from the most recent balance sheet that New Era Electronics had liabilities of NT$254.9m falling due within a year, and liabilities of NT$48.6m due beyond that. Offsetting this, it had NT$1.55b in cash and NT$200.6m in receivables that were due within 12 months. So it actually has NT$1.45b more liquid assets than total liabilities.

This luscious liquidity implies that New Era Electronics' balance sheet is sturdy like a giant sequoia tree. Having regard to this fact, we think its balance sheet is as strong as an ox. Succinctly put, New Era Electronics boasts net cash, so it's fair to say it does not have a heavy debt load! When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since New Era Electronics will need earnings to service that debt. 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 New Era Electronics had a loss before interest and tax, and actually shrunk its revenue by 26%, to NT$662m. That makes us nervous, to say the least.

So How Risky Is New Era Electronics?

Although New Era Electronics had an earnings before interest and tax (EBIT) loss over the last twelve months, it made a statutory profit of NT$14m. So when you consider it has net cash, along with the statutory profit, the stock probably isn't as risky as it might seem, at least in the short term. The next few years will be important as the business matures. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. We've identified 3 warning signs with New Era Electronics (at least 1 which shouldn't be ignored) , and understanding them should be part of your investment process.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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