Here's Why Higgstec (GTSM:5220) Can Manage Its Debt Responsibly

Warren Buffett famously said, '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. As with many other companies Higgstec Inc. (GTSM:5220) makes use of debt. But the real question is whether this debt is making the company risky.

What Risk Does Debt Bring?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. 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, plenty of companies use debt to fund growth, without any negative consequences. The first step when considering a company's debt levels is to consider its cash and debt 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 December 2020 Higgstec had NT$270.4m of debt, an increase on NT$40.0m, over one year. But it also has NT$375.0m in cash to offset that, meaning it has NT$104.6m 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$296.3m due within 12 months and liabilities of NT$234.5m due beyond that. Offsetting these obligations, it had cash of NT$375.0m as well as receivables valued at NT$214.3m due within 12 months. So it actually has NT$58.5m 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. Succinctly put, Higgstec boasts net cash, so it's fair to say it does not have a heavy debt load!

Better yet, Higgstec grew its EBIT by 117% last year, which is an impressive improvement. That boost will make it even easier to pay down debt going forward. When analysing debt levels, the balance sheet is the obvious place to start. But it is Higgstec'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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. Higgstec 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 last three years, Higgstec reported free cash flow worth 10% of its EBIT, which is really quite low. For us, cash conversion that low sparks a little paranoia about is ability to extinguish debt.

Summing up

While it is always sensible to investigate a company's debt, in this case Higgstec has NT$104.6m in net cash and a decent-looking balance sheet. And we liked the look of last year's 117% year-on-year EBIT growth. So is Higgstec's debt a risk? It doesn't seem so to us. 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. To that end, you should learn about the 3 warning signs we've spotted with Higgstec (including 1 which is a bit concerning) .

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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