GeoVision (TPE:3356) Has A Rock Solid Balance Sheet

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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, GeoVision Inc. (TPE:3356) 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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for GeoVision

How Much Debt Does GeoVision Carry?

The image below, which you can click on for greater detail, shows that GeoVision had debt of NT$452.3m at the end of September 2020, a reduction from NT$1.08b over a year. However, its balance sheet shows it holds NT$1.27b in cash, so it actually has NT$812.9m net cash.

How Strong Is GeoVision's Balance Sheet?

According to the last reported balance sheet, GeoVision had liabilities of NT$760.4m due within 12 months, and liabilities of NT$51.5m due beyond 12 months. On the other hand, it had cash of NT$1.27b and NT$110.4m worth of receivables due within a year. So it actually has NT$563.8m more liquid assets than total liabilities.

It's good to see that GeoVision has plenty of liquidity on its balance sheet, suggesting conservative management of liabilities. Due to its strong net asset position, it is not likely to face issues with its lenders. Simply put, the fact that GeoVision has more cash than debt is arguably a good indication that it can manage its debt safely.

On top of that, GeoVision grew its EBIT by 97% over the last twelve months, and that growth will make it easier to handle its debt. The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since GeoVision will need earnings to service that debt. 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. GeoVision may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. Over the last two years, GeoVision actually produced more free cash flow than EBIT. That sort of strong cash conversion gets us as excited as the crowd when the beat drops at a Daft Punk concert.

Summing up

While we empathize with investors who find debt concerning, you should keep in mind that GeoVision has net cash of NT$812.9m, as well as more liquid assets than liabilities. And it impressed us with free cash flow of -NT$78m, being 1,003% of its EBIT. When it comes to GeoVision's debt, we sufficiently relaxed that our mind turns to the jacuzzi. 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 instance, we've identified 3 warning signs for GeoVision (1 doesn't sit too well with us) you should be aware of.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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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