Does Chander Electronics (GTSM:8068) Have A Healthy Balance Sheet?

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. Importantly, Chander Electronics Corp. (GTSM:8068) does carry debt. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

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. 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for Chander Electronics

What Is Chander Electronics's Net Debt?

As you can see below, Chander Electronics had NT$399.1m of debt at September 2020, down from NT$440.8m a year prior. However, because it has a cash reserve of NT$189.4m, its net debt is less, at about NT$209.7m.

A Look At Chander Electronics's Liabilities

According to the last reported balance sheet, Chander Electronics had liabilities of NT$575.1m due within 12 months, and liabilities of NT$220.0k due beyond 12 months. Offsetting these obligations, it had cash of NT$189.4m as well as receivables valued at NT$395.3m due within 12 months. So these liquid assets roughly match the total liabilities.

Having regard to Chander Electronics's size, it seems that its liquid assets are well balanced with its total liabilities. So it's very unlikely that the NT$1.94b company is short on cash, but still worth keeping an eye on the balance sheet. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Chander Electronics 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.

Over 12 months, Chander Electronics made a loss at the EBIT level, and saw its revenue drop to NT$1.7b, which is a fall of 42%. To be frank that doesn't bode well.

Caveat Emptor

While Chander Electronics's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. Indeed, it lost NT$3.9m at the EBIT level. Looking on the brighter side, the business has adequate liquid assets, which give it time to grow and develop before its debt becomes a near-term issue. Still, we'd be more encouraged to study the business in depth if it already had some free cash flow. This one is a bit too risky for our liking. 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. Be aware that Chander Electronics is showing 3 warning signs in our investment analysis , and 2 of those shouldn't be ignored...

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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