These 4 Measures Indicate That Radiation Technology (GTSM:6514) Is Using Debt Safely

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. Importantly, Radiation Technology, Inc. (GTSM:6514) does carry debt. But the real question is whether this debt is making the company risky.

When Is Debt A Problem?

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. If things get really bad, the lenders can take control of the business. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for Radiation Technology

What Is Radiation Technology's Net Debt?

The image below, which you can click on for greater detail, shows that Radiation Technology had debt of NT$58.2m at the end of September 2020, a reduction from NT$62.4m over a year. However, its balance sheet shows it holds NT$296.2m in cash, so it actually has NT$238.0m net cash.

How Strong Is Radiation Technology's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Radiation Technology had liabilities of NT$252.4m due within 12 months and liabilities of NT$17.8m due beyond that. On the other hand, it had cash of NT$296.2m and NT$220.9m worth of receivables due within a year. So it can boast NT$246.9m more liquid assets than total liabilities.

This excess liquidity suggests that Radiation Technology is taking a careful approach to debt. Because it has plenty of assets, it is unlikely to have trouble with its lenders. Simply put, the fact that Radiation Technology has more cash than debt is arguably a good indication that it can manage its debt safely.

The good news is that Radiation Technology has increased its EBIT by 8.1% over twelve months, which should ease any concerns about debt repayment. When analysing debt levels, the balance sheet is the obvious place to start. But it is Radiation 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.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. Radiation 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. During the last three years, Radiation Technology generated free cash flow amounting to a very robust 93% of its EBIT, more than we'd expect. That positions it well to pay down debt if desirable to do so.

Summing up

While it is always sensible to investigate a company's debt, in this case Radiation Technology has NT$238.0m in net cash and a decent-looking balance sheet. The cherry on top was that in converted 93% of that EBIT to free cash flow, bringing in NT$91m. So is Radiation Technology's debt a risk? It doesn't seem so to us. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. Consider risks, for instance. Every company has them, and we've spotted 3 warning signs for Radiation Technology 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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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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