Here's Why Lin Horn Technology (GTSM:5464) Can Afford Some Debt

Warren Buffett famously said, '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. Importantly, Lin Horn Technology Co., Ltd. (GTSM:5464) does carry debt. But should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

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. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for Lin Horn Technology

What Is Lin Horn Technology's Debt?

The image below, which you can click on for greater detail, shows that at September 2020 Lin Horn Technology had debt of NT$1.73b, up from NT$1.29b in one year. However, because it has a cash reserve of NT$1.52b, its net debt is less, at about NT$201.9m.

A Look At Lin Horn Technology's Liabilities

We can see from the most recent balance sheet that Lin Horn Technology had liabilities of NT$1.89b falling due within a year, and liabilities of NT$373.3m due beyond that. On the other hand, it had cash of NT$1.52b and NT$123.0m worth of receivables due within a year. So it has liabilities totalling NT$621.4m more than its cash and near-term receivables, combined.

This deficit is considerable relative to its market capitalization of NT$902.6m, so it does suggest shareholders should keep an eye on Lin Horn Technology's use of debt. Should its lenders demand that it shore up the balance sheet, shareholders would likely face severe dilution. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Lin Horn Technology 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, Lin Horn Technology made a loss at the EBIT level, and saw its revenue drop to NT$1.0b, which is a fall of 31%. That makes us nervous, to say the least.

Caveat Emptor

Not only did Lin Horn Technology's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). Indeed, it lost a very considerable NT$122m at the EBIT level. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. So we think its balance sheet is a little strained, though not beyond repair. However, it doesn't help that it burned through NT$387m of cash over the last year. So suffice it to say we consider the stock very risky. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. Take risks, for example - Lin Horn Technology has 4 warning signs (and 2 which can't be ignored) we think you should know about.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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