Is EISO Enterprise (GTSM:5291) Using Too Much Debt?

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 might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. Importantly, EISO Enterprise Co., Ltd. (GTSM:5291) does carry debt. But the real question is whether this debt is making the company risky.

What Risk Does Debt Bring?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for EISO Enterprise

How Much Debt Does EISO Enterprise Carry?

As you can see below, EISO Enterprise had NT$106.0m of debt at September 2020, down from NT$150.4m a year prior. However, it does have NT$256.7m in cash offsetting this, leading to net cash of NT$150.7m.

A Look At EISO Enterprise's Liabilities

The latest balance sheet data shows that EISO Enterprise had liabilities of NT$438.8m due within a year, and liabilities of NT$87.1m falling due after that. Offsetting these obligations, it had cash of NT$256.7m as well as receivables valued at NT$361.4m due within 12 months. So it actually has NT$92.1m more liquid assets than total liabilities.

This short term liquidity is a sign that EISO Enterprise could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, EISO Enterprise boasts net cash, so it's fair to say it does not have a heavy debt load!

In fact EISO Enterprise's saving grace is its low debt levels, because its EBIT has tanked 25% in the last twelve months. When it comes to paying off debt, falling earnings are no more useful than sugary sodas are for your health. When analysing debt levels, the balance sheet is the obvious place to start. But it is EISO Enterprise'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.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. While EISO Enterprise 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. Over the most recent three years, EISO Enterprise recorded free cash flow worth 78% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This cold hard cash means it can reduce its debt when it wants to.

Summing up

While it is always sensible to investigate a company's debt, in this case EISO Enterprise has NT$150.7m in net cash and a decent-looking balance sheet. And it impressed us with free cash flow of NT$25m, being 78% of its EBIT. So we are not troubled with EISO Enterprise's debt use. 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. For instance, we've identified 4 warning signs for EISO Enterprise that you should be aware of.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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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