We Think General Interface Solution (GIS) Holding (TPE:6456) Can Stay On Top Of Its 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.' 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, General Interface Solution (GIS) Holding Limited (TPE:6456) does carry debt. But the real question is whether this debt is making the company risky.

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. 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, 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. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for General Interface Solution (GIS) Holding

What Is General Interface Solution (GIS) Holding's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of September 2020 General Interface Solution (GIS) Holding had NT$8.87b of debt, an increase on NT$7.73b, over one year. But it also has NT$16.6b in cash to offset that, meaning it has NT$7.77b net cash.

How Strong Is General Interface Solution (GIS) Holding's Balance Sheet?

We can see from the most recent balance sheet that General Interface Solution (GIS) Holding had liabilities of NT$53.4b falling due within a year, and liabilities of NT$4.60b due beyond that. Offsetting these obligations, it had cash of NT$16.6b as well as receivables valued at NT$36.4b due within 12 months. So it has liabilities totalling NT$4.92b more than its cash and near-term receivables, combined.

Of course, General Interface Solution (GIS) Holding has a market capitalization of NT$40.2b, so these liabilities are probably manageable. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. Despite its noteworthy liabilities, General Interface Solution (GIS) Holding boasts net cash, so it's fair to say it does not have a heavy debt load!

The modesty of its debt load may become crucial for General Interface Solution (GIS) Holding if management cannot prevent a repeat of the 39% cut to EBIT over the last year. When a company sees its earnings tank, it can sometimes find its relationships with its lenders turn sour. The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine General Interface Solution (GIS) Holding's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. General Interface Solution (GIS) Holding 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 most recent three years, General Interface Solution (GIS) Holding recorded free cash flow worth 66% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This cold hard cash means it can reduce its debt when it wants to.

Summing up

While General Interface Solution (GIS) Holding does have more liabilities than liquid assets, it also has net cash of NT$7.77b. The cherry on top was that in converted 66% of that EBIT to free cash flow, bringing in NT$3.2b. So we are not troubled with General Interface Solution (GIS) Holding's debt use. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. Case in point: We've spotted 1 warning sign for General Interface Solution (GIS) Holding 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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