We Think Netronix (GTSM:6143) Can Manage Its Debt With Ease

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. We note that Netronix, Inc. (GTSM:6143) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

What Risk Does Debt Bring?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for Netronix

How Much Debt Does Netronix Carry?

As you can see below, Netronix had NT$1.12b of debt at September 2020, down from NT$3.06b a year prior. However, its balance sheet shows it holds NT$1.89b in cash, so it actually has NT$773.2m net cash.

How Strong Is Netronix's Balance Sheet?

According to the last reported balance sheet, Netronix had liabilities of NT$2.97b due within 12 months, and liabilities of NT$124.8m due beyond 12 months. On the other hand, it had cash of NT$1.89b and NT$1.40b worth of receivables due within a year. So it can boast NT$192.3m more liquid assets than total liabilities.

This short term liquidity is a sign that Netronix could probably pay off its debt with ease, as its balance sheet is far from stretched. Simply put, the fact that Netronix has more cash than debt is arguably a good indication that it can manage its debt safely.

Even more impressive was the fact that Netronix grew its EBIT by 144% over twelve months. If maintained that growth will make the debt even more manageable in the years ahead. 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 Netronix 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.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While Netronix 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. Happily for any shareholders, Netronix actually produced more free cash flow than EBIT over the last three years. That sort of strong cash generation warms our hearts like a puppy in a bumblebee suit.

Summing up

While it is always sensible to investigate a company's debt, in this case Netronix has NT$773.2m in net cash and a decent-looking balance sheet. And it impressed us with free cash flow of NT$471m, being 137% of its EBIT. So is Netronix'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. Like risks, for instance. Every company has them, and we've spotted 3 warning signs for Netronix (of which 1 is a bit unpleasant!) 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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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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