Does Lanner Electronics (GTSM:6245) Have A Healthy Balance Sheet?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. Importantly, Lanner Electronics Inc. (GTSM:6245) does carry debt. But is this debt a concern to shareholders?

Why Does Debt Bring Risk?

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 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, plenty of companies use debt to fund growth, without any negative consequences. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for Lanner Electronics

What Is Lanner Electronics's Net Debt?

As you can see below, at the end of September 2020, Lanner Electronics had NT$230.0m of debt, up from NT$112.1m a year ago. Click the image for more detail. But it also has NT$1.49b in cash to offset that, meaning it has NT$1.26b net cash.

How Strong Is Lanner Electronics' Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Lanner Electronics had liabilities of NT$2.34b due within 12 months and liabilities of NT$330.7m due beyond that. Offsetting this, it had NT$1.49b in cash and NT$1.18b in receivables that were due within 12 months. So these liquid assets roughly match the total liabilities.

This state of affairs indicates that Lanner Electronics' balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So it's very unlikely that the NT$7.66b company is short on cash, but still worth keeping an eye on the balance sheet. While it does have liabilities worth noting, Lanner Electronics also has more cash than debt, so we're pretty confident it can manage its debt safely.

The good news is that Lanner Electronics has increased its EBIT by 2.1% over twelve months, which should ease any concerns about debt repayment. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Lanner Electronics's earnings that will influence how the balance sheet holds up in the future. 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. While Lanner Electronics 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. Over the most recent three years, Lanner Electronics recorded free cash flow worth 77% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This free cash flow puts the company in a good position to pay down debt, when appropriate.

Summing up

While it is always sensible to look at a company's total liabilities, it is very reassuring that Lanner Electronics has NT$1.26b in net cash. The cherry on top was that in converted 77% of that EBIT to free cash flow, bringing in NT$715m. So we don't think Lanner Electronics's use of debt is risky. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. For example, we've discovered 1 warning sign for Lanner Electronics that you should be aware of before investing here.

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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