Does Higgstec (GTSM:5220) 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.' 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. We note that Higgstec Inc. (GTSM:5220) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. If things get really bad, the lenders can take control of the business. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for Higgstec

What Is Higgstec's Debt?

You can click the graphic below for the historical numbers, but it shows that as of September 2020 Higgstec had NT$344.5m of debt, an increase on NT$60.0m, over one year. However, its balance sheet shows it holds NT$374.3m in cash, so it actually has NT$29.8m net cash.

A Look At Higgstec's Liabilities

Zooming in on the latest balance sheet data, we can see that Higgstec had liabilities of NT$413.6m due within 12 months and liabilities of NT$224.5m due beyond that. Offsetting this, it had NT$374.3m in cash and NT$345.7m in receivables that were due within 12 months. So it can boast NT$81.9m more liquid assets than total liabilities.

This surplus suggests that Higgstec has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Simply put, the fact that Higgstec has more cash than debt is arguably a good indication that it can manage its debt safely.

On top of that, Higgstec grew its EBIT by 42% over the last twelve months, and that growth will make it easier to handle its debt. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Higgstec's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. While Higgstec has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. Considering the last three years, Higgstec actually recorded a cash outflow, overall. Debt is usually more expensive, and almost always more risky in the hands of a company with negative free cash flow. Shareholders ought to hope for an improvement.

Summing up

While we empathize with investors who find debt concerning, you should keep in mind that Higgstec has net cash of NT$29.8m, as well as more liquid assets than liabilities. And it impressed us with its EBIT growth of 42% over the last year. So we don't think Higgstec's use of debt is 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 4 warning signs for Higgstec (1 shouldn't be ignored) 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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