Is EISO Enterprise (GTSM:5291) A Risky Investment?

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.' 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 note that EISO Enterprise Co., Ltd. (GTSM:5291) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

When Is Debt Dangerous?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. 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.

View our latest analysis for EISO Enterprise

How Much Debt Does EISO Enterprise Carry?

The image below, which you can click on for greater detail, shows that at December 2020 EISO Enterprise had debt of NT$152.7m, up from NT$87.7m in one year. But it also has NT$281.6m in cash to offset that, meaning it has NT$128.9m net cash.

A Look At EISO Enterprise's Liabilities

According to the last reported balance sheet, EISO Enterprise had liabilities of NT$539.4m due within 12 months, and liabilities of NT$83.2m due beyond 12 months. Offsetting this, it had NT$281.6m in cash and NT$354.3m in receivables that were due within 12 months. So it can boast NT$13.2m more liquid assets than total liabilities.

This state of affairs indicates that EISO Enterprise's balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So while it's hard to imagine that the NT$1.17b company is struggling for cash, we still think it's worth monitoring its balance sheet. Succinctly put, EISO Enterprise boasts net cash, so it's fair to say it does not have a heavy debt load!

On the other hand, EISO Enterprise's EBIT dived 14%, over the last year. If that rate of decline in earnings continues, the company could find itself in a tight spot. 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 EISO Enterprise 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. EISO Enterprise 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. Happily for any shareholders, EISO Enterprise actually produced more free cash flow than EBIT over the last three years. That sort of strong cash generation warms our hearts like a puppy in a bumblebee suit.

Summing up

While it is always sensible to investigate a company's debt, in this case EISO Enterprise has NT$128.9m in net cash and a decent-looking balance sheet. The cherry on top was that in converted 105% of that EBIT to free cash flow, bringing in NT$53m. So we are not troubled with EISO Enterprise's debt use. 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. Be aware that EISO Enterprise is showing 2 warning signs in our investment analysis , you should know about...

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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