Litemax Electronics (GTSM:4995) Has A Pretty 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.' 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. As with many other companies Litemax Electronics Inc. (GTSM:4995) makes use of debt. But the real question is whether this debt is making the company risky.

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. If things get really bad, the lenders can take control of the business. 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, 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 thing to do when considering how much debt a business uses is to look at its cash and debt together.

View our latest analysis for Litemax Electronics

What Is Litemax Electronics's Net Debt?

As you can see below, Litemax Electronics had NT$161.0m of debt at September 2020, down from NT$174.9m a year prior. But it also has NT$212.1m in cash to offset that, meaning it has NT$51.0m net cash.

A Look At Litemax Electronics's Liabilities

We can see from the most recent balance sheet that Litemax Electronics had liabilities of NT$233.8m falling due within a year, and liabilities of NT$158.7m due beyond that. On the other hand, it had cash of NT$212.1m and NT$156.1m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by NT$24.2m.

This state of affairs indicates that Litemax Electronics's balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So it's very unlikely that the NT$1.59b company is short on cash, but still worth keeping an eye on the balance sheet. While it does have liabilities worth noting, Litemax Electronics also has more cash than debt, so we're pretty confident it can manage its debt safely.

It is just as well that Litemax Electronics's load is not too heavy, because its EBIT was down 37% over the last year. Falling earnings (if the trend continues) could eventually make even modest debt quite risky. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Litemax Electronics will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. Litemax Electronics may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. Over the most recent three years, Litemax Electronics recorded free cash flow worth 72% of its EBIT, which is around normal, given free cash flow excludes interest and tax. 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 Litemax Electronics has NT$51.0m in net cash. And it impressed us with free cash flow of NT$164m, being 72% of its EBIT. So we don't have any problem with Litemax Electronics's use of debt. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. Take risks, for example - Litemax Electronics has 2 warning signs we think you should be aware of.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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