Health Check: How Prudently Does Chien Wei Precise Technology (GTSM:8092) Use Debt?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. As with many other companies Chien Wei Precise Technology Co., Ltd. (GTSM:8092) makes use of debt. But should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for Chien Wei Precise Technology

How Much Debt Does Chien Wei Precise Technology Carry?

As you can see below, at the end of December 2020, Chien Wei Precise Technology had NT$362.9m of debt, up from NT$345.5m a year ago. Click the image for more detail. However, because it has a cash reserve of NT$40.3m, its net debt is less, at about NT$322.5m.

How Strong Is Chien Wei Precise Technology's Balance Sheet?

According to the last reported balance sheet, Chien Wei Precise Technology had liabilities of NT$231.5m due within 12 months, and liabilities of NT$258.5m due beyond 12 months. Offsetting this, it had NT$40.3m in cash and NT$67.8m in receivables that were due within 12 months. So its liabilities total NT$381.9m more than the combination of its cash and short-term receivables.

When you consider that this deficiency exceeds the company's NT$376.1m market capitalization, you might well be inclined to review the balance sheet intently. In the scenario where the company had to clean up its balance sheet quickly, it seems likely shareholders would suffer extensive dilution. When analysing debt levels, the balance sheet is the obvious place to start. But it is Chien Wei Precise Technology'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.

Over 12 months, Chien Wei Precise Technology saw its revenue hold pretty steady, and it did not report positive earnings before interest and tax. While that's not too bad, we'd prefer see growth.

Caveat Emptor

Over the last twelve months Chien Wei Precise Technology produced an earnings before interest and tax (EBIT) loss. To be specific the EBIT loss came in at NT$29m. When we look at that alongside the significant liabilities, we're not particularly confident about the company. We'd want to see some strong near-term improvements before getting too interested in the stock. Not least because it had negative free cash flow of NT$3.2m over the last twelve months. That means it's on the risky side of things. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. Case in point: We've spotted 1 warning sign for Chien Wei Precise Technology you should be aware of.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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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