Is Brave C&H SupplyLtd (GTSM:6538) A Risky Investment?

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. As with many other companies Brave C&H Supply Co.,Ltd. (GTSM:6538) makes use of debt. But the more important question is: how much risk is that debt creating?

What Risk Does Debt Bring?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for Brave C&H SupplyLtd

How Much Debt Does Brave C&H SupplyLtd Carry?

You can click the graphic below for the historical numbers, but it shows that as of September 2020 Brave C&H SupplyLtd had NT$138.5m of debt, an increase on NT$127.9m, over one year. However, it does have NT$814.1m in cash offsetting this, leading to net cash of NT$675.6m.

How Strong Is Brave C&H SupplyLtd's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Brave C&H SupplyLtd had liabilities of NT$511.5m due within 12 months and liabilities of NT$238.6m due beyond that. On the other hand, it had cash of NT$814.1m and NT$1.05b worth of receivables due within a year. So it can boast NT$1.11b more liquid assets than total liabilities.

It's good to see that Brave C&H SupplyLtd has plenty of liquidity on its balance sheet, suggesting conservative management of liabilities. Given it has easily adequate short term liquidity, we don't think it will have any issues with its lenders. Simply put, the fact that Brave C&H SupplyLtd has more cash than debt is arguably a good indication that it can manage its debt safely.

Better yet, Brave C&H SupplyLtd grew its EBIT by 143% last year, which is an impressive improvement. If maintained that growth will make the debt even more manageable in the years ahead. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Brave C&H SupplyLtd'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. Brave C&H SupplyLtd 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. Looking at the most recent two years, Brave C&H SupplyLtd recorded free cash flow of 41% of its EBIT, which is weaker than we'd expect. That weak cash conversion makes it more difficult to handle indebtedness.

Summing up

While it is always sensible to investigate a company's debt, in this case Brave C&H SupplyLtd has NT$675.6m in net cash and a decent-looking balance sheet. And it impressed us with its EBIT growth of 143% over the last year. So is Brave C&H SupplyLtd'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 instance, we've identified 2 warning signs for Brave C&H SupplyLtd (1 can't be ignored) 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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