Is Pacific Image Electronics (GTSM:6228) A Risky Investment?

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' 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. As with many other companies Pacific Image Electronics Co., Ltd. (GTSM:6228) makes use of debt. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. 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, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

View our latest analysis for Pacific Image Electronics

How Much Debt Does Pacific Image Electronics Carry?

You can click the graphic below for the historical numbers, but it shows that Pacific Image Electronics had NT$159.4m of debt in September 2020, down from NT$170.8m, one year before. However, it does have NT$50.3m in cash offsetting this, leading to net debt of about NT$109.1m.

How Strong Is Pacific Image Electronics' Balance Sheet?

According to the last reported balance sheet, Pacific Image Electronics had liabilities of NT$92.8m due within 12 months, and liabilities of NT$94.6m due beyond 12 months. Offsetting this, it had NT$50.3m in cash and NT$4.30m in receivables that were due within 12 months. So its liabilities total NT$132.7m more than the combination of its cash and short-term receivables.

While this might seem like a lot, it is not so bad since Pacific Image Electronics has a market capitalization of NT$408.9m, and so it could probably strengthen its balance sheet by raising capital if it needed to. However, it is still worthwhile taking a close look at its ability to pay off debt. When analysing debt levels, the balance sheet is the obvious place to start. But it is Pacific Image Electronics's earnings that will influence how the balance sheet holds up in the future. 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.

In the last year Pacific Image Electronics's revenue was pretty flat, and it made a negative EBIT. While that's not too bad, we'd prefer see growth.

Caveat Emptor

Over the last twelve months Pacific Image Electronics produced an earnings before interest and tax (EBIT) loss. Indeed, it lost NT$28m at the EBIT level. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. However, it doesn't help that it burned through NT$1.8m of cash over the last year. So to be blunt we think it is risky. 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. These risks can be hard to spot. Every company has them, and we've spotted 4 warning signs for Pacific Image Electronics you should know about.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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