Would Pacific Image Electronics (GTSM:6228) Be Better Off With Less Debt?

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. We note that Pacific Image Electronics Co., Ltd. (GTSM:6228) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

When Is Debt Dangerous?

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. If things get really bad, the lenders can take control of the business. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. 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 step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for Pacific Image Electronics

What Is Pacific Image Electronics's Net Debt?

The image below, which you can click on for greater detail, shows that Pacific Image Electronics had debt of NT$159.4m at the end of September 2020, a reduction from NT$170.8m over a year. On the flip side, it has NT$50.3m in cash leading to net debt of about NT$109.1m.

A Look At Pacific Image Electronics's Liabilities

The latest balance sheet data shows that Pacific Image Electronics had liabilities of NT$92.8m due within a year, and liabilities of NT$94.6m falling due after that. Offsetting this, it had NT$50.3m in cash and NT$4.30m in receivables that were due within 12 months. So it has liabilities totalling NT$132.7m more than its cash and near-term receivables, combined.

Pacific Image Electronics has a market capitalization of NT$322.3m, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Pacific Image Electronics 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.

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. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any 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 suffice it to say we do consider the stock to be risky. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. Consider risks, for instance. Every company has them, and we've spotted 3 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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