Is Egis Technology (GTSM:6462) Using Too Much 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 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. We note that Egis Technology Inc. (GTSM:6462) does have debt on its balance sheet. But is this debt a concern to shareholders?

Why Does Debt Bring Risk?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. If things get really bad, the lenders can take control of the business. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

See our latest analysis for Egis Technology

How Much Debt Does Egis Technology Carry?

You can click the graphic below for the historical numbers, but it shows that Egis Technology had NT$1.06b of debt in September 2020, down from NT$1.38b, one year before. But on the other hand it also has NT$1.37b in cash, leading to a NT$312.1m net cash position.

A Look At Egis Technology's Liabilities

According to the last reported balance sheet, Egis Technology had liabilities of NT$1.25b due within 12 months, and liabilities of NT$1.10b due beyond 12 months. Offsetting these obligations, it had cash of NT$1.37b as well as receivables valued at NT$1.03b due within 12 months. So it actually has NT$52.0m more liquid assets than total liabilities.

This state of affairs indicates that Egis Technology's 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$11.5b company is short on cash, but still worth keeping an eye on the balance sheet. Succinctly put, Egis Technology boasts net cash, so it's fair to say it does not have a heavy debt load!

In addition to that, we're happy to report that Egis Technology has boosted its EBIT by 69%, thus reducing the spectre of future debt repayments. The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine Egis Technology's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. 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 recorded free cash flow worth a fulsome 91% of its EBIT, which is stronger than we'd usually expect. That puts it in a very strong position to pay down debt.

Summing up

While we empathize with investors who find debt concerning, you should keep in mind that Egis Technology has net cash of NT$312.1m, as well as more liquid assets than liabilities. And it impressed us with free cash flow of NT$881m, being 91% of its EBIT. So we don't think Egis Technology's use of debt is risky. 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. For example, we've discovered 1 warning sign for Egis Technology 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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