These 4 Measures Indicate That Subtron Technology (GTSM:8179) Is Using Debt Reasonably Well

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.' 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 Subtron Technology Co., Ltd (GTSM:8179) makes use of debt. But the more important question is: how much risk is that debt creating?

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. 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. 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.

Check out our latest analysis for Subtron Technology

What Is Subtron Technology's Debt?

As you can see below, at the end of December 2020, Subtron Technology had NT$2.25b of debt, up from NT$1.07b a year ago. Click the image for more detail. However, because it has a cash reserve of NT$677.3m, its net debt is less, at about NT$1.57b.

How Strong Is Subtron Technology's Balance Sheet?

The latest balance sheet data shows that Subtron Technology had liabilities of NT$1.18b due within a year, and liabilities of NT$2.06b falling due after that. Offsetting these obligations, it had cash of NT$677.3m as well as receivables valued at NT$1.08b due within 12 months. So it has liabilities totalling NT$1.48b more than its cash and near-term receivables, combined.

Subtron Technology has a market capitalization of NT$6.00b, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. However, it is still worthwhile taking a close look at its ability to pay off debt.

We use two main ratios to inform us about debt levels relative to earnings. The first is net debt divided by earnings before interest, tax, depreciation, and amortization (EBITDA), while the second is how many times its earnings before interest and tax (EBIT) covers its interest expense (or its interest cover, for short). Thus we consider debt relative to earnings both with and without depreciation and amortization expenses.

Subtron Technology's net debt is 2.6 times its EBITDA, which is a significant but still reasonable amount of leverage. However, its interest coverage of 14.6 is very high, suggesting that the interest expense on the debt is currently quite low. Notably, Subtron Technology's EBIT launched higher than Elon Musk, gaining a whopping 230% on last year. There's no doubt that we learn most about debt from the balance sheet. But it is Subtron 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.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. So the logical step is to look at the proportion of that EBIT that is matched by actual free cash flow. During the last three years, Subtron Technology burned a lot of cash. While that may be a result of expenditure for growth, it does make the debt far more risky.

Our View

Subtron Technology's conversion of EBIT to free cash flow was a real negative on this analysis, although the other factors we considered were considerably better. There's no doubt that its ability to to cover its interest expense with its EBIT is pretty flash. When we consider all the elements mentioned above, it seems to us that Subtron Technology is managing its debt quite well. But a word of caution: we think debt levels are high enough to justify ongoing monitoring. 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. Case in point: We've spotted 3 warning signs for Subtron Technology you should be aware of, and 1 of them shouldn't be ignored.

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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