Is ACTi (GTSM:5240) Using Debt In A Risky Way?

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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 ACTi Corporation (GTSM:5240) does use debt in its business. But should shareholders be worried about its use of debt?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. 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 ACTi

What Is ACTi's Debt?

The chart below, which you can click on for greater detail, shows that ACTi had NT$60.2m in debt in December 2020; about the same as the year before. However, it does have NT$89.2m in cash offsetting this, leading to net cash of NT$29.0m.

How Healthy Is ACTi's Balance Sheet?

The latest balance sheet data shows that ACTi had liabilities of NT$179.1m due within a year, and liabilities of NT$39.7m falling due after that. Offsetting these obligations, it had cash of NT$89.2m as well as receivables valued at NT$44.2m due within 12 months. So its liabilities total NT$85.4m more than the combination of its cash and short-term receivables.

This deficit isn't so bad because ACTi is worth NT$179.2m, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. But it's clear that we should definitely closely examine whether it can manage its debt without dilution. While it does have liabilities worth noting, ACTi also has more cash than debt, so we're pretty confident it can manage its debt safely. The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since ACTi 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 ACTi had a loss before interest and tax, and actually shrunk its revenue by 21%, to NT$426m. That makes us nervous, to say the least.

So How Risky Is ACTi?

Statistically speaking companies that lose money are riskier than those that make money. And we do note that ACTi had an earnings before interest and tax (EBIT) loss, over the last year. Indeed, in that time it burnt through NT$4.1m of cash and made a loss of NT$94m. But the saving grace is the NT$29.0m on the balance sheet. That means it could keep spending at its current rate for more than two years. Summing up, we're a little skeptical of this one, as it seems fairly risky in the absence of free cashflow. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. For example, we've discovered 3 warning signs for ACTi (2 are a bit unpleasant!) that you should be aware of before investing here.

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.

If you decide to trade ACTi, use the lowest-cost* platform that is rated #1 Overall by Barron’s, Interactive Brokers. Trade stocks, options, futures, forex, bonds and funds on 135 markets, all from a single integrated account. Promoted

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.
^*Interactive Brokers Rated Lowest Cost Broker by StockBrokers.com Annual Online Review 2020

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.