Gish International (GTSM:8067) Is Carrying A Fair Bit Of 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.' 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. As with many other companies Gish International Co., Ltd (GTSM:8067) makes use of debt. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

See our latest analysis for Gish International

What Is Gish International's Net Debt?

You can click the graphic below for the historical numbers, but it shows that Gish International had NT$240.6m of debt in September 2020, down from NT$304.2m, one year before. However, because it has a cash reserve of NT$19.2m, its net debt is less, at about NT$221.4m.

A Look At Gish International's Liabilities

Zooming in on the latest balance sheet data, we can see that Gish International had liabilities of NT$198.0m due within 12 months and liabilities of NT$83.6m due beyond that. On the other hand, it had cash of NT$19.2m and NT$29.2m worth of receivables due within a year. So it has liabilities totalling NT$233.2m more than its cash and near-term receivables, combined.

This is a mountain of leverage relative to its market capitalization of NT$315.0m. Should its lenders demand that it shore up the balance sheet, shareholders would likely face severe dilution. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Gish International will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

In the last year Gish International wasn't profitable at an EBIT level, but managed to grow its revenue by 37%, to NT$272m. With any luck the company will be able to grow its way to profitability.

Caveat Emptor

While we can certainly appreciate Gish International's revenue growth, its earnings before interest and tax (EBIT) loss is not ideal. Indeed, it lost a very considerable NT$40m at the EBIT level. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. So we think its balance sheet is a little strained, though not beyond repair. We would feel better if it turned its trailing twelve month loss of NT$45m into a profit. So we do think this stock is quite risky. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. These risks can be hard to spot. Every company has them, and we've spotted 3 warning signs for Gish International (of which 1 doesn't sit too well with us!) you should know about.

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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