Is ASEC International (GTSM:6113) Using Too Much Debt?

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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. We can see that ASEC International Corporation (GTSM:6113) 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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for ASEC International

What Is ASEC International's Debt?

You can click the graphic below for the historical numbers, but it shows that as of September 2020 ASEC International had NT$111.2m of debt, an increase on NT$10.0m, over one year. However, it does have NT$157.4m in cash offsetting this, leading to net cash of NT$46.2m.

How Healthy Is ASEC International's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that ASEC International had liabilities of NT$275.1m due within 12 months and liabilities of NT$115.9m due beyond that. Offsetting this, it had NT$157.4m in cash and NT$254.5m in receivables that were due within 12 months. So it actually has NT$20.9m more liquid assets than total liabilities.

This short term liquidity is a sign that ASEC International could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, ASEC International boasts net cash, so it's fair to say it does not have a heavy debt load! When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since ASEC International will need earnings to service that debt. 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.

Over 12 months, ASEC International made a loss at the EBIT level, and saw its revenue drop to NT$1.2b, which is a fall of 11%. That's not what we would hope to see.

So How Risky Is ASEC International?

Statistically speaking companies that lose money are riskier than those that make money. And we do note that ASEC International had an earnings before interest and tax (EBIT) loss, over the last year. Indeed, in that time it burnt through NT$177m of cash and made a loss of NT$27m. Given it only has net cash of NT$46.2m, the company may need to raise more capital if it doesn't reach break-even soon. Even though its balance sheet seems sufficiently liquid, debt always makes us a little nervous if a company doesn't produce free cash flow regularly. 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. Be aware that ASEC International is showing 2 warning signs in our investment analysis , and 1 of those is potentially serious...

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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