Is Z-Com (GTSM:8176) Using Debt In A Risky Way?

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.' 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. Importantly, Z-Com, Inc. (GTSM:8176) does carry debt. But the real question is whether this debt is making the company risky.

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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, 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 Z-Com

What Is Z-Com's Debt?

You can click the graphic below for the historical numbers, but it shows that Z-Com had NT$80.3m of debt in December 2020, down from NT$168.1m, one year before. But it also has NT$165.0m in cash to offset that, meaning it has NT$84.7m net cash.

How Healthy Is Z-Com's Balance Sheet?

The latest balance sheet data shows that Z-Com had liabilities of NT$176.0m due within a year, and liabilities of NT$24.9m falling due after that. On the other hand, it had cash of NT$165.0m and NT$74.7m worth of receivables due within a year. So it can boast NT$38.7m more liquid assets than total liabilities.

This surplus suggests that Z-Com has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Simply put, the fact that Z-Com has more cash than debt is arguably a good indication that it can manage its debt safely. When analysing debt levels, the balance sheet is the obvious place to start. But it is Z-Com'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.

In the last year Z-Com had a loss before interest and tax, and actually shrunk its revenue by 62%, to NT$412m. To be frank that doesn't bode well.

So How Risky Is Z-Com?

While Z-Com lost money on an earnings before interest and tax (EBIT) level, it actually generated positive free cash flow NT$4.7m. 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. 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 Z-Com has 2 warning signs (and 1 which shouldn't be ignored) we think you should know about.

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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