Is DynaColor (GTSM:5489) A Risky Investment?

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. We can see that DynaColor, Inc. (GTSM:5489) does use debt in its business. But is this debt a concern to shareholders?

When Is Debt A Problem?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. If things get really bad, the lenders can take control of the business. 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. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for DynaColor

What Is DynaColor's Debt?

The image below, which you can click on for greater detail, shows that DynaColor had debt of NT$260.1m at the end of December 2020, a reduction from NT$365.9m over a year. However, its balance sheet shows it holds NT$1.13b in cash, so it actually has NT$870.4m net cash.

A Look At DynaColor's Liabilities

Zooming in on the latest balance sheet data, we can see that DynaColor had liabilities of NT$488.0m due within 12 months and liabilities of NT$66.0m due beyond that. Offsetting this, it had NT$1.13b in cash and NT$272.0m in receivables that were due within 12 months. So it actually has NT$848.5m more liquid assets than total liabilities.

This surplus suggests that DynaColor 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. Simply put, the fact that DynaColor has more cash than debt is arguably a good indication that it can manage its debt safely.

It is just as well that DynaColor's load is not too heavy, because its EBIT was down 77% over the last year. When it comes to paying off debt, falling earnings are no more useful than sugary sodas are for your health. 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 DynaColor 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 company can only pay off debt with cold hard cash, not accounting profits. While DynaColor 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 last three years, DynaColor actually produced more free cash flow than EBIT. There's nothing better than incoming cash when it comes to staying in your lenders' good graces.

Summing up

While we empathize with investors who find debt concerning, you should keep in mind that DynaColor has net cash of NT$870.4m, as well as more liquid assets than liabilities. And it impressed us with free cash flow of -NT$31m, being 111% of its EBIT. So is DynaColor's debt a risk? It doesn't seem so to us. 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. To that end, you should learn about the 2 warning signs we've spotted with DynaColor (including 1 which shouldn't be ignored) .

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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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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