These 4 Measures Indicate That Getac Holdings (TWSE:3005) Is Using Debt Safely

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a 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. We can see that Getac Holdings Corporation (TWSE:3005) does use debt in its business. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for Getac Holdings

What Is Getac Holdings's Net Debt?

The chart below, which you can click on for greater detail, shows that Getac Holdings had NT$2.58b in debt in September 2024; about the same as the year before. But on the other hand it also has NT$12.3b in cash, leading to a NT$9.75b net cash position.

How Healthy Is Getac Holdings' Balance Sheet?

The latest balance sheet data shows that Getac Holdings had liabilities of NT$13.2b due within a year, and liabilities of NT$4.34b falling due after that. Offsetting these obligations, it had cash of NT$12.3b as well as receivables valued at NT$8.14b due within 12 months. So it actually has NT$2.97b more liquid assets than total liabilities.

This surplus suggests that Getac Holdings has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, Getac Holdings boasts net cash, so it's fair to say it does not have a heavy debt load!

Another good sign is that Getac Holdings has been able to increase its EBIT by 24% in twelve months, making it easier to pay down debt. 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 Getac Holdings'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 business needs free cash flow to pay off debt; accounting profits just don't cut it. Getac Holdings 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 three years, Getac Holdings 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 Getac Holdings has net cash of NT$9.75b, as well as more liquid assets than liabilities. And it impressed us with free cash flow of NT$4.3b, being 103% of its EBIT. So is Getac Holdings's debt a risk? It doesn't seem so to us. 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. For example, we've discovered 1 warning sign for Getac Holdings that you should be aware of before investing here.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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.