Is Firich Enterprises (GTSM:8076) Using Too Much Debt?

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the 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 Firich Enterprises Co., Ltd. (GTSM:8076) makes use of debt. But is this debt a concern to shareholders?

When Is Debt Dangerous?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for Firich Enterprises

What Is Firich Enterprises's Debt?

You can click the graphic below for the historical numbers, but it shows that Firich Enterprises had NT$1.66b of debt in September 2020, down from NT$1.87b, one year before. But on the other hand it also has NT$1.67b in cash, leading to a NT$2.91m net cash position.

How Strong Is Firich Enterprises' Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Firich Enterprises had liabilities of NT$2.55b due within 12 months and liabilities of NT$27.6m due beyond that. Offsetting these obligations, it had cash of NT$1.67b as well as receivables valued at NT$677.2m due within 12 months. So its liabilities total NT$234.2m more than the combination of its cash and short-term receivables.

Of course, Firich Enterprises has a market capitalization of NT$8.10b, so these liabilities are probably manageable. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. Despite its noteworthy liabilities, Firich Enterprises boasts net cash, so it's fair to say it does not have a heavy debt load!

Shareholders should be aware that Firich Enterprises's EBIT was down 87% last year. If that earnings trend continues then paying off its debt will be about as easy as herding cats on to a roller coaster. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Firich Enterprises 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.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. Firich Enterprises 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 last three years, Firich Enterprises actually produced more free cash flow than EBIT. There's nothing better than incoming cash when it comes to staying in your lenders' good graces.

Summing up

We could understand if investors are concerned about Firich Enterprises's liabilities, but we can be reassured by the fact it has has net cash of NT$2.91m. And it impressed us with free cash flow of NT$186m, being 128% of its EBIT. So we are not troubled with Firich Enterprises's debt use. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. For example, we've discovered 2 warning signs for Firich Enterprises that you should be aware of before investing here.

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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