We believe Xin Chio Global (GTSM: 3171) can manage its debt with ease
Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett said “volatility is far from risk.” When we think about the risk level of a business, we always like to look at its use of debt because debt overload can lead to bankruptcy. We can see that Xin Chio Global Co., Ltd. (GTSM: 3171) uses debt in his business. But does this debt worry shareholders?
When is debt dangerous?
Debt and other liabilities become risky for a business when it cannot easily meet these obligations, either with free cash flow or by raising capital at an attractive price. An integral part of capitalism is the process of “creative destruction” where bankrupt companies are ruthlessly liquidated by their bankers. However, a more common (but still costly) situation is where a company has to dilute its shareholders at a cheap stock price just to get its debt under control. That said, the most common situation is where a business manages its debt reasonably well – and to its advantage. The first step in examining a company’s debt levels is to consider its cash flow and debt together.
Check out our latest review for Xin Chio Global
What is Xin Chio Global’s debt?
You can click on the graph below for historical figures, but it shows that as of December 2020, Xin Chio Global had a debt of NT $ 333.9 million, an increase of NT $ 273.3 million on a year. However, he also had NT $ 132.0 million in cash, and therefore his net debt is NT $ 201.9 million.
A look at the responsibilities of Xin Chio Global
We can see from the most recent balance sheet that Xin Chio Global had NT $ 621.4 million liabilities due in one year, and NT $ 202.1 million liabilities beyond. In return for these obligations, he had cash of NT $ 132.0 million as well as receivables valued at NT $ 760.1 million with a 12-month maturity. So he actually has NT $ 68.6 million After liquid assets than total liabilities.
This surplus suggests that Xin Chio Global has a prudent balance sheet and could likely eliminate its debt without too much difficulty.
We use two main ratios to tell us about leverage versus earnings levels. The first is net debt divided by earnings before interest, taxes, depreciation, and amortization (EBITDA), while the second is the number of times its earnings before interest and taxes (EBIT) covers its interest expense (or interest coverage, in short). The advantage of this approach is that we take into account both the absolute quantum of the debt (with net debt over EBITDA) and the actual interest charges associated with that debt (with its interest coverage ratio).
Xin Chio Global has a low debt to EBITDA ratio of just 1.4. But what’s really cool is that he actually managed to earn more interest than he paid, over the last year. So it’s fair to say that he can handle his debts like a hot teppanyaki chef takes care of the kitchen. The good news is that Xin Chio Global increased its EBIT by 7.2% year-over-year, which should allay concerns about debt repayment. When analyzing debt levels, the balance sheet is the obvious starting point. But it is Xin Chio Global’s earnings that will influence the balance sheet in the future. So when you consider debt, it’s really worth looking at the profit trend. Click here for an interactive snapshot.
But our last consideration is also important, because a company cannot pay its debt with profits on paper; he needs cash. We must therefore clearly examine whether this EBIT leads to a corresponding free cash flow. In the past three years, Xin Chio Global has actually produced more free cash flow than EBIT. This kind of big cash conversion turns us on as much as the crowd when the beat drops at a Daft Punk concert.
Our point of view
Fortunately, Xin Chio Global’s impressive interest coverage means it has the upper hand on its debt. And the good news does not end there, because its conversion of EBIT to free cash flow also supports this impression! Zooming out, Xin Chio Global seems to be using debt quite reasonably; and it nods at us. While debt comes with risk, when used wisely, it can also provide a higher return on equity. When analyzing debt levels, the balance sheet is the obvious starting point. But at the end of the day, every business can contain risks that exist off the balance sheet. For example, we discovered 3 warning signs for Xin Chio Global which you should be aware of before investing here.
If you want to invest in companies that can generate profits without the burden of debt, take a look at this free list of growing companies that have net cash on the balance sheet.
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