Here's Why LuxNet (GTSM:4979) Can Afford Some Debt

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' 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. Importantly, LuxNet Corporation (GTSM:4979) does carry debt. But the real question is whether this debt is making the company risky.

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. 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for LuxNet

How Much Debt Does LuxNet Carry?

You can click the graphic below for the historical numbers, but it shows that LuxNet had NT$580.7m of debt in September 2020, down from NT$759.3m, one year before. However, it also had NT$336.1m in cash, and so its net debt is NT$244.5m.

How Healthy Is LuxNet's Balance Sheet?

We can see from the most recent balance sheet that LuxNet had liabilities of NT$511.3m falling due within a year, and liabilities of NT$321.0m due beyond that. Offsetting these obligations, it had cash of NT$336.1m as well as receivables valued at NT$189.8m due within 12 months. So its liabilities total NT$306.3m more than the combination of its cash and short-term receivables.

Given LuxNet has a market capitalization of NT$3.06b, it's hard to believe these liabilities pose much threat. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if LuxNet can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Over 12 months, LuxNet reported revenue of NT$1.2b, which is a gain of 6.1%, although it did not report any earnings before interest and tax. We usually like to see faster growth from unprofitable companies, but each to their own.

Caveat Emptor

Importantly, LuxNet had an earnings before interest and tax (EBIT) loss over the last year. To be specific the EBIT loss came in at NT$160m. 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$79m of cash over the last year. So suffice it to say we do consider the stock to be risky. 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. For instance, we've identified 1 warning sign for LuxNet that you should be aware of.

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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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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