Is First Hi-tec Enterprise (GTSM:5439) 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. As with many other companies First Hi-tec Enterprise Co., Ltd. (GTSM:5439) makes use of debt. But is this debt a concern to shareholders?

Why Does Debt Bring Risk?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. 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.

See our latest analysis for First Hi-tec Enterprise

What Is First Hi-tec Enterprise's Debt?

You can click the graphic below for the historical numbers, but it shows that as of September 2020 First Hi-tec Enterprise had NT$112.4m of debt, an increase on NT$49.4m, over one year. But it also has NT$340.6m in cash to offset that, meaning it has NT$228.1m net cash.

How Strong Is First Hi-tec Enterprise's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that First Hi-tec Enterprise had liabilities of NT$674.0m due within 12 months and liabilities of NT$59.5m due beyond that. Offsetting this, it had NT$340.6m in cash and NT$771.0m in receivables that were due within 12 months. So it can boast NT$378.1m more liquid assets than total liabilities.

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

And we also note warmly that First Hi-tec Enterprise grew its EBIT by 18% last year, making its debt load easier to handle. When analysing debt levels, the balance sheet is the obvious place to start. But it is First Hi-tec 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, while the tax-man may adore accounting profits, lenders only accept cold hard cash. First Hi-tec 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. During the last three years, First Hi-tec Enterprise produced sturdy free cash flow equating to 62% of its EBIT, about what we'd expect. This free cash flow puts the company in a good position to pay down debt, when appropriate.

Summing up

While it is always sensible to investigate a company's debt, in this case First Hi-tec Enterprise has NT$228.1m in net cash and a decent-looking balance sheet. And it impressed us with its EBIT growth of 18% over the last year. So is First Hi-tec Enterprise'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. Consider for instance, the ever-present spectre of investment risk. We've identified 1 warning sign with First Hi-tec Enterprise , and understanding them should be part of your investment process.

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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