We Think GrandTech C.G. Systems (GTSM:6123) Can Manage Its Debt With Ease

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. As with many other companies GrandTech C.G. Systems Inc. (GTSM:6123) makes use of debt. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

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. 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, 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.

Check out our latest analysis for GrandTech C.G. Systems

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

As you can see below, at the end of September 2020, GrandTech C.G. Systems had NT$649.3m of debt, up from NT$594.7m a year ago. Click the image for more detail. But it also has NT$1.03b in cash to offset that, meaning it has NT$385.0m net cash.

A Look At GrandTech C.G. Systems's Liabilities

The latest balance sheet data shows that GrandTech C.G. Systems had liabilities of NT$1.39b due within a year, and liabilities of NT$59.2m falling due after that. Offsetting this, it had NT$1.03b in cash and NT$796.1m in receivables that were due within 12 months. So it can boast NT$378.2m more liquid assets than total liabilities.

It's good to see that GrandTech C.G. Systems has plenty of liquidity on its balance sheet, suggesting conservative management of liabilities. Because it has plenty of assets, it is unlikely to have trouble 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.

Fortunately, GrandTech C.G. Systems grew its EBIT by 9.9% in the last year, making that debt load look even more manageable. There's no doubt that we learn most about debt from the balance sheet. 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 84% of its EBIT, which is stronger than we'd usually expect. That puts it in a very strong position to pay down debt.

Summing up

While it is always sensible to investigate a company's debt, in this case GrandTech C.G. Systems has NT$385.0m in net cash and a decent-looking balance sheet. The cherry on top was that in converted 84% of that EBIT to free cash flow, bringing in NT$302m. So is GrandTech C.G. Systems's debt a risk? It doesn't seem so to us. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. Consider for instance, the ever-present spectre of investment risk. We've identified 3 warning signs with GrandTech C.G. Systems , and understanding them should be part of your investment process.

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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