Does Global Brands Manufacture (TWSE:6191) Have A Healthy Balance Sheet?

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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. As with many other companies Global Brands Manufacture Ltd. (TWSE:6191) makes use of debt. But is this debt a concern to shareholders?

When Is Debt A Problem?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

See our latest analysis for Global Brands Manufacture

What Is Global Brands Manufacture's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of December 2023 Global Brands Manufacture had NT$9.25b of debt, an increase on NT$7.85b, over one year. However, its balance sheet shows it holds NT$11.3b in cash, so it actually has NT$2.04b net cash.

A Look At Global Brands Manufacture's Liabilities

We can see from the most recent balance sheet that Global Brands Manufacture had liabilities of NT$12.5b falling due within a year, and liabilities of NT$4.10b due beyond that. Offsetting this, it had NT$11.3b in cash and NT$7.88b in receivables that were due within 12 months. So it can boast NT$2.53b more liquid assets than total liabilities.

This short term liquidity is a sign that Global Brands Manufacture could probably pay off its debt with ease, as its balance sheet is far from stretched. Simply put, the fact that Global Brands Manufacture has more cash than debt is arguably a good indication that it can manage its debt safely.

In addition to that, we're happy to report that Global Brands Manufacture has boosted its EBIT by 34%, thus reducing the spectre of future debt repayments. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Global Brands Manufacture 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. Global Brands Manufacture 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. During the last three years, Global Brands Manufacture generated free cash flow amounting to a very robust 98% of its EBIT, more than we'd expect. That puts it in a very strong position to pay down debt.

Summing Up

While it is always sensible to investigate a company's debt, in this case Global Brands Manufacture has NT$2.04b in net cash and a decent-looking balance sheet. And it impressed us with free cash flow of NT$3.4b, being 98% of its EBIT. So we don't think Global Brands Manufacture's use of debt is risky. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. Case in point: We've spotted 1 warning sign for Global Brands Manufacture you should be aware of.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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.