Is GrandTech C.G. Systems (GTSM:6123) Using Too Much 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, GrandTech C.G. Systems Inc. (GTSM:6123) does carry debt. But is this debt a concern to shareholders?

When Is Debt A Problem?

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. If things get really bad, the lenders can take control of the business. 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. 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 GrandTech C.G. Systems

What Is GrandTech C.G. Systems's Debt?

The image below, which you can click on for greater detail, shows that GrandTech C.G. Systems had debt of NT$570.0m at the end of December 2020, a reduction from NT$614.2m over a year. But it also has NT$1.03b in cash to offset that, meaning it has NT$462.9m net cash.

How Healthy Is GrandTech C.G. Systems' Balance Sheet?

Zooming in on the latest balance sheet data, we can see that GrandTech C.G. Systems had liabilities of NT$1.36b due within 12 months and liabilities of NT$29.2m due beyond that. Offsetting these obligations, it had cash of NT$1.03b as well as receivables valued at NT$931.6m due within 12 months. So it actually has NT$575.6m more liquid assets than total liabilities.

This surplus suggests that GrandTech C.G. Systems is using debt in a way that is appears to be both safe and conservative. Due to its strong net asset position, it is not likely to face issues with its lenders. Simply put, the fact that GrandTech C.G. Systems has more cash than debt is arguably a good indication that it can manage its debt safely.

While GrandTech C.G. Systems doesn't seem to have gained much on the EBIT line, at least earnings remain stable for now. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since GrandTech C.G. Systems 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 business needs free cash flow to pay off debt; accounting profits just don't cut it. GrandTech C.G. Systems 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. Over the last three years, GrandTech C.G. Systems recorded free cash flow worth a fulsome 86% of its EBIT, which is stronger than we'd usually expect. That positions it well to pay down debt if desirable to do so.

Summing up

While it is always sensible to investigate a company's debt, in this case GrandTech C.G. Systems has NT$462.9m in net cash and a decent-looking balance sheet. And it impressed us with free cash flow of NT$304m, being 86% of its EBIT. So we don't think GrandTech C.G. Systems's use of debt is 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. To that end, you should be aware of the 2 warning signs we've spotted with GrandTech C.G. Systems .

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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