Chien Wei Precise Technology (GTSM:8092) Has Debt But No Earnings; Should You Worry?

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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. We note that Chien Wei Precise Technology Co., Ltd. (GTSM:8092) does have debt on its balance sheet. But is this debt a concern to shareholders?

Why Does Debt Bring Risk?

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 usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for Chien Wei Precise Technology

What Is Chien Wei Precise Technology's Net Debt?

The chart below, which you can click on for greater detail, shows that Chien Wei Precise Technology had NT$352.1m in debt in September 2020; about the same as the year before. On the flip side, it has NT$32.4m in cash leading to net debt of about NT$319.7m.

A Look At Chien Wei Precise Technology's Liabilities

The latest balance sheet data shows that Chien Wei Precise Technology had liabilities of NT$249.9m due within a year, and liabilities of NT$252.1m falling due after that. On the other hand, it had cash of NT$32.4m and NT$67.3m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by NT$402.3m.

When you consider that this deficiency exceeds the company's NT$319.4m market capitalization, you might well be inclined to review the balance sheet intently. Hypothetically, extremely heavy dilution would be required if the company were forced to pay down its liabilities by raising capital at the current share price. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Chien Wei Precise Technology 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.

Over 12 months, Chien Wei Precise Technology made a loss at the EBIT level, and saw its revenue drop to NT$302m, which is a fall of 8.2%. We would much prefer see growth.

Caveat Emptor

Importantly, Chien Wei Precise Technology had an earnings before interest and tax (EBIT) loss over the last year. To be specific the EBIT loss came in at NT$29m. Considering that alongside the liabilities mentioned above make us nervous about the company. We'd want to see some strong near-term improvements before getting too interested in the stock. It's fair to say the loss of NT$23m didn't encourage us either; we'd like to see a profit. In the meantime, we consider the stock to be risky. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. For example, we've discovered 1 warning sign for Chien Wei Precise Technology 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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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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