Homenema Technology Incorporation (GTSM:8087) Has Debt But No Earnings; Should You Worry?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. We note that Homenema Technology Incorporation (GTSM:8087) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

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. 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 step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for Homenema Technology Incorporation

How Much Debt Does Homenema Technology Incorporation Carry?

The image below, which you can click on for greater detail, shows that at September 2020 Homenema Technology Incorporation had debt of NT$49.0m, up from NT$39.0m in one year. But on the other hand it also has NT$79.5m in cash, leading to a NT$30.5m net cash position.

A Look At Homenema Technology Incorporation's Liabilities

According to the last reported balance sheet, Homenema Technology Incorporation had liabilities of NT$18.2m due within 12 months, and liabilities of NT$46.1m due beyond 12 months. Offsetting this, it had NT$79.5m in cash and NT$20.0m in receivables that were due within 12 months. So it actually has NT$35.3m more liquid assets than total liabilities.

It's good to see that Homenema Technology Incorporation has plenty of liquidity on its balance sheet, suggesting conservative management of liabilities. Because it has plenty of assets, it is unlikely to have trouble with its lenders. Simply put, the fact that Homenema Technology Incorporation has more cash than debt is arguably a good indication that it can manage its debt safely. There's no doubt that we learn most about debt from the balance sheet. But it is Homenema Technology Incorporation's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Over 12 months, Homenema Technology Incorporation made a loss at the EBIT level, and saw its revenue drop to NT$66m, which is a fall of 25%. That makes us nervous, to say the least.

So How Risky Is Homenema Technology Incorporation?

While Homenema Technology Incorporation lost money on an earnings before interest and tax (EBIT) level, it actually generated positive free cash flow NT$22m. So although it is loss-making, it doesn't seem to have too much near-term balance sheet risk, keeping in mind the net cash. We'll feel more comfortable with the stock once EBIT is positive, given the lacklustre revenue growth. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. For example, we've discovered 3 warning signs for Homenema Technology Incorporation (2 can't be ignored!) that you should be aware of before investing here.

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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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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