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

By
Simply Wall St
Published
April 29, 2021
TPEX:6514
Source: Shutterstock

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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 Radiation Technology, Inc. (GTSM:6514) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

What Risk Does Debt Bring?

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. 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, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for Radiation Technology

How Much Debt Does Radiation Technology Carry?

As you can see below, at the end of December 2020, Radiation Technology had NT$62.7m of debt, up from NT$50.0m a year ago. Click the image for more detail. But it also has NT$343.9m in cash to offset that, meaning it has NT$281.3m net cash.

debt-equity-history-analysis
GTSM:6514 Debt to Equity History April 30th 2021

A Look At Radiation Technology's Liabilities

According to the last reported balance sheet, Radiation Technology had liabilities of NT$281.3m due within 12 months, and liabilities of NT$20.8m due beyond 12 months. On the other hand, it had cash of NT$343.9m and NT$205.4m worth of receivables due within a year. So it actually has NT$247.2m more liquid assets than total liabilities.

This surplus suggests that Radiation Technology is using debt in a way that is appears to be both safe and conservative. Due to its strong net asset position, it is not likely to face issues 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.

While Radiation Technology doesn't seem to have gained much on the EBIT line, at least earnings remain stable for now. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Radiation Technology will need earnings to service that debt. 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, a business needs free cash flow to pay off debt; accounting profits just don't cut it. While Radiation Technology 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 last three years, Radiation Technology recorded free cash flow worth a fulsome 82% 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 it is always sensible to investigate a company's debt, in this case Radiation Technology has NT$281.3m in net cash and a decent-looking balance sheet. The cherry on top was that in converted 82% of that EBIT to free cash flow, bringing in NT$51m. So is Radiation Technology's debt a risk? It doesn't seem so to us. 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 - Radiation Technology has 3 warning signs we think you should be aware of.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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