Does Egis Technology (GTSM:6462) Have A Healthy Balance Sheet?

Warren Buffett famously said, '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. As with many other companies Egis Technology Inc. (GTSM:6462) makes use of debt. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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, debt can be an important tool in businesses, particularly capital heavy businesses. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for Egis Technology

What Is Egis Technology's Net Debt?

You can click the graphic below for the historical numbers, but it shows that Egis Technology had NT$990.0m of debt in December 2020, down from NT$1.19b, one year before. But it also has NT$1.68b in cash to offset that, meaning it has NT$686.2m net cash.

How Healthy Is Egis Technology's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Egis Technology had liabilities of NT$870.7m due within 12 months and liabilities of NT$1.10b due beyond that. Offsetting these obligations, it had cash of NT$1.68b as well as receivables valued at NT$304.8m due within 12 months. So these liquid assets roughly match the total liabilities.

Having regard to Egis Technology's size, it seems that its liquid assets are well balanced with its total liabilities. So it's very unlikely that the NT$12.1b company is short on cash, but still worth keeping an eye on the balance sheet. Simply put, the fact that Egis Technology has more cash than debt is arguably a good indication that it can manage its debt safely.

In fact Egis Technology's saving grace is its low debt levels, because its EBIT has tanked 23% in the last twelve months. When a company sees its earnings tank, it can sometimes find its relationships with its lenders turn sour. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Egis Technology can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. Egis Technology 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, Egis Technology actually produced more free cash flow than EBIT. 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 Egis Technology has NT$686.2m in net cash and a decent-looking balance sheet. The cherry on top was that in converted 103% of that EBIT to free cash flow, bringing in NT$513m. So we don't have any problem with Egis Technology's use of debt. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. For instance, we've identified 1 warning sign for Egis Technology that you should be aware of.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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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