Is ATrack Technology (GTSM:6465) Using Too Much Debt?

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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 ATrack Technology Inc. (GTSM:6465) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

When Is Debt Dangerous?

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 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, plenty of companies use debt to fund growth, without any negative consequences. 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 ATrack Technology

How Much Debt Does ATrack Technology Carry?

As you can see below, ATrack Technology had NT$251.7m of debt at December 2020, down from NT$271.7m a year prior. On the flip side, it has NT$240.5m in cash leading to net debt of about NT$11.1m.

How Healthy Is ATrack Technology's Balance Sheet?

According to the last reported balance sheet, ATrack Technology had liabilities of NT$49.1m due within 12 months, and liabilities of NT$240.0m due beyond 12 months. On the other hand, it had cash of NT$240.5m and NT$18.2m worth of receivables due within a year. So it has liabilities totalling NT$30.4m more than its cash and near-term receivables, combined.

Given ATrack Technology has a market capitalization of NT$897.3m, it's hard to believe these liabilities pose much threat. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. But either way, ATrack Technology has virtually no net debt, so it's fair to say it does not have a heavy debt load! There's no doubt that we learn most about debt from the balance sheet. But it is ATrack Technology'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.

Over 12 months, ATrack Technology made a loss at the EBIT level, and saw its revenue drop to NT$241m, which is a fall of 8.2%. We would much prefer see growth.

Caveat Emptor

Importantly, ATrack Technology had an earnings before interest and tax (EBIT) loss over the last year. To be specific the EBIT loss came in at NT$59m. 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. We would feel better if it turned its trailing twelve month loss of NT$94m into a profit. So to be blunt we do think it is risky. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. To that end, you should learn about the 4 warning signs we've spotted with ATrack Technology (including 2 which are a bit unpleasant) .

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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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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