Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a 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. Importantly, ATW Technology Inc. (GTSM:8097) does carry debt. But is this debt a concern to shareholders?
When Is Debt A Problem?
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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first step when considering a company's debt levels is to consider its cash and debt together.
See our latest analysis for ATW Technology
What Is ATW Technology's Debt?
The image below, which you can click on for greater detail, shows that at September 2020 ATW Technology had debt of NT$244.6m, up from NT$220.7m in one year. However, it also had NT$40.6m in cash, and so its net debt is NT$204.0m.
How Strong Is ATW Technology's Balance Sheet?
We can see from the most recent balance sheet that ATW Technology had liabilities of NT$58.3m falling due within a year, and liabilities of NT$239.9m due beyond that. On the other hand, it had cash of NT$40.6m and NT$22.9m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by NT$234.6m.
This is a mountain of leverage relative to its market capitalization of NT$304.1m. This suggests shareholders would be heavily diluted if the company needed to shore up its balance sheet in a hurry. There's no doubt that we learn most about debt from the balance sheet. But it is ATW Technology'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.
In the last year ATW Technology wasn't profitable at an EBIT level, but managed to grow its revenue by 12%, to NT$73m. We usually like to see faster growth from unprofitable companies, but each to their own.
Caveat Emptor
Importantly, ATW Technology had an earnings before interest and tax (EBIT) loss over the last year. To be specific the EBIT loss came in at NT$22m. 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. So we think its balance sheet is a little strained, though not beyond repair. For example, we would not want to see a repeat of last year's loss of NT$20m. So to be blunt we do think it is 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. Be aware that ATW Technology is showing 3 warning signs in our investment analysis , and 1 of those is a bit concerning...
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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About TPEX:8097
ATW Technology
Researches, develops, manufactures, and sells wireless communication products in the United States, Europe, and Asia.
Adequate balance sheet very low.
