Is Chander Electronics (GTSM:8068) Using Too Much 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.' 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 is this debt a concern to shareholders?

When Is Debt Dangerous?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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, plenty of companies use debt to fund growth, without any negative consequences. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for Chander Electronics

What Is Chander Electronics's Net Debt?

The image below, which you can click on for greater detail, shows that Chander Electronics had debt of NT$359.4m at the end of December 2020, a reduction from NT$405.0m over a year. However, it does have NT$27.6m in cash offsetting this, leading to net debt of about NT$331.8m.

How Healthy Is Chander Electronics' Balance Sheet?

According to the last reported balance sheet, Chander Electronics had liabilities of NT$584.5m due within 12 months, and liabilities of NT$135.0k due beyond 12 months. On the other hand, it had cash of NT$27.6m and NT$454.2m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by NT$102.9m.

Given Chander Electronics has a market capitalization of NT$1.58b, it's hard to believe these liabilities pose much threat. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. There's no doubt that we learn most about debt from the balance sheet. But it is Chander Electronics's earnings that will influence how the balance sheet holds up in the future. 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.

In the last year Chander Electronics had a loss before interest and tax, and actually shrunk its revenue by 18%, to NT$1.9b. That's not what we would hope to see.

Caveat Emptor

Not only did Chander Electronics's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). Indeed, it lost NT$9.8m at the EBIT level. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. However, it doesn't help that it burned through NT$109m of cash over the last year. So suffice it to say we consider the stock very risky. 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. We've identified 3 warning signs with Chander Electronics (at least 2 which can't be ignored) , and understanding them should be part of your investment process.

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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