G-TECH Optoelectronics (TPE:3149) Is Making Moderate Use Of Debt

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. Importantly, G-TECH Optoelectronics Corporation (TPE:3149) does carry debt. But the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for G-TECH Optoelectronics

What Is G-TECH Optoelectronics's Debt?

The chart below, which you can click on for greater detail, shows that G-TECH Optoelectronics had NT$2.00b in debt in September 2020; about the same as the year before. However, it does have NT$388.9m in cash offsetting this, leading to net debt of about NT$1.61b.

How Strong Is G-TECH Optoelectronics' Balance Sheet?

According to the last reported balance sheet, G-TECH Optoelectronics had liabilities of NT$1.30b due within 12 months, and liabilities of NT$1.17b due beyond 12 months. Offsetting these obligations, it had cash of NT$388.9m as well as receivables valued at NT$930.5m due within 12 months. So it has liabilities totalling NT$1.15b more than its cash and near-term receivables, combined.

Given G-TECH Optoelectronics has a market capitalization of NT$5.94b, it's hard to believe these liabilities pose much threat. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine G-TECH Optoelectronics's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Over 12 months, G-TECH Optoelectronics made a loss at the EBIT level, and saw its revenue drop to NT$2.6b, which is a fall of 15%. We would much prefer see growth.

Caveat Emptor

While G-TECH Optoelectronics's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. To be specific the EBIT loss came in at NT$341m. 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. We would feel better if it turned its trailing twelve month loss of NT$273m into a profit. So we do think this stock is quite risky. 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. For example - G-TECH Optoelectronics has 1 warning sign we think you should be aware of.

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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