Does Gia-Tzoong Enterprise (GTSM:5355) 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.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. As with many other companies Gia-Tzoong Enterprise Co., Ltd. (GTSM:5355) makes use of debt. But should shareholders be worried about its use of debt?

When Is Debt Dangerous?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. 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. 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. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for Gia-Tzoong Enterprise

What Is Gia-Tzoong Enterprise's Debt?

As you can see below, at the end of September 2020, Gia-Tzoong Enterprise had NT$582.8m of debt, up from NT$489.4m a year ago. Click the image for more detail. However, it does have NT$848.0m in cash offsetting this, leading to net cash of NT$265.2m.

How Strong Is Gia-Tzoong Enterprise's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Gia-Tzoong Enterprise had liabilities of NT$256.5m due within 12 months and liabilities of NT$510.8m due beyond that. Offsetting these obligations, it had cash of NT$848.0m as well as receivables valued at NT$175.0m due within 12 months. So it can boast NT$255.7m more liquid assets than total liabilities.

This surplus suggests that Gia-Tzoong Enterprise is using debt in a way that is appears to be both safe and conservative. Given it has easily adequate short term liquidity, we don't think it will have any issues with its lenders. Succinctly put, Gia-Tzoong Enterprise boasts net cash, so it's fair to say it does not have a heavy debt load! There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Gia-Tzoong 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.

Over 12 months, Gia-Tzoong Enterprise made a loss at the EBIT level, and saw its revenue drop to NT$666m, which is a fall of 29%. That makes us nervous, to say the least.

So How Risky Is Gia-Tzoong Enterprise?

By their very nature companies that are losing money are more risky than those with a long history of profitability. And we do note that Gia-Tzoong Enterprise had an earnings before interest and tax (EBIT) loss, over the last year. And over the same period it saw negative free cash outflow of NT$45m and booked a NT$5.5m accounting loss. While this does make the company a bit risky, it's important to remember it has net cash of NT$265.2m. That means it could keep spending at its current rate for more than two years. Overall, its balance sheet doesn't seem overly risky, at the moment, but we're always cautious until we see the positive free cash flow. 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 2 warning signs for Gia-Tzoong Enterprise (1 is concerning) you should be aware of.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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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