Is Global Brands Manufacture (TWSE:6191) Using Too Much 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. As with many other companies Global Brands Manufacture Ltd. (TWSE:6191) makes use of 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. If things get really bad, the lenders can take control of the business. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

Check out our latest analysis for Global Brands Manufacture

What Is Global Brands Manufacture's Net Debt?

As you can see below, at the end of March 2024, Global Brands Manufacture had NT$8.51b of debt, up from NT$8.10b a year ago. Click the image for more detail. But it also has NT$11.4b in cash to offset that, meaning it has NT$2.87b net cash.

How Strong Is Global Brands Manufacture's Balance Sheet?

We can see from the most recent balance sheet that Global Brands Manufacture had liabilities of NT$12.2b falling due within a year, and liabilities of NT$4.30b due beyond that. Offsetting these obligations, it had cash of NT$11.4b as well as receivables valued at NT$7.96b due within 12 months. So it can boast NT$2.87b 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.

On top of that, Global Brands Manufacture grew its EBIT by 40% over the last twelve months, and that growth will make it easier to handle its debt. When analysing debt levels, the balance sheet is the obvious place to start. 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, a company can only pay off debt with cold hard cash, not accounting profits. While Global Brands Manufacture has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. Happily for any shareholders, Global Brands Manufacture actually produced more free cash flow than EBIT over the last three years. There's nothing better than incoming cash when it comes to staying in your lenders' good graces.

Summing Up

While it is always sensible to investigate a company's debt, in this case Global Brands Manufacture has NT$2.87b in net cash and a decent-looking balance sheet. The cherry on top was that in converted 100% of that EBIT to free cash flow, bringing in NT$3.2b. So we don't think Global Brands Manufacture's use of debt is risky. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. For example - Global Brands Manufacture has 1 warning sign we think 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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com