We Think East Tender Optoelectronics (GTSM:6588) Can Manage Its Debt With Ease

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 can see that East Tender Optoelectronics Corporation (GTSM:6588) does use debt in its business. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for East Tender Optoelectronics

What Is East Tender Optoelectronics's Net Debt?

The image below, which you can click on for greater detail, shows that at September 2020 East Tender Optoelectronics had debt of NT$126.4m, up from NT$113.5m in one year. However, its balance sheet shows it holds NT$495.0m in cash, so it actually has NT$368.6m net cash.

A Look At East Tender Optoelectronics's Liabilities

Zooming in on the latest balance sheet data, we can see that East Tender Optoelectronics had liabilities of NT$71.7m due within 12 months and liabilities of NT$109.1m due beyond that. Offsetting these obligations, it had cash of NT$495.0m as well as receivables valued at NT$121.4m due within 12 months. So it can boast NT$435.6m more liquid assets than total liabilities.

This surplus suggests that East Tender Optoelectronics 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. Succinctly put, East Tender Optoelectronics boasts net cash, so it's fair to say it does not have a heavy debt load!

On top of that, East Tender Optoelectronics grew its EBIT by 60% over the last twelve months, and that growth will make it easier to handle its debt. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since East Tender Optoelectronics 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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. East Tender Optoelectronics 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 most recent three years, East Tender Optoelectronics recorded free cash flow worth 62% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This cold hard cash means it can reduce its debt when it wants to.

Summing up

While it is always sensible to investigate a company's debt, in this case East Tender Optoelectronics has NT$368.6m in net cash and a decent-looking balance sheet. And it impressed us with its EBIT growth of 60% over the last year. So we don't think East Tender Optoelectronics's use of debt is risky. 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. Take risks, for example - East Tender Optoelectronics has 3 warning signs (and 1 which is a bit concerning) we think you should know about.

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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