Does Kenmec Mechanical Engineering (GTSM:6125) Have A Healthy Balance Sheet?

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.’ When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. Importantly, Kenmec Mechanical Engineering Co., Ltd. (GTSM:6125) does carry debt. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

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. Ultimately, if the company can’t fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. 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. When we think about a company’s use of debt, we first look at cash and debt together.

See our latest analysis for Kenmec Mechanical Engineering

What Is Kenmec Mechanical Engineering’s Net Debt?

As you can see below, Kenmec Mechanical Engineering had NT$1.97b of debt, at December 2020, which is about the same as the year before. You can click the chart for greater detail. But it also has NT$2.10b in cash to offset that, meaning it has NT$132.9m net cash.

How Strong Is Kenmec Mechanical Engineering’s Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Kenmec Mechanical Engineering had liabilities of NT$3.56b due within 12 months and liabilities of NT$1.39b due beyond that. Offsetting this, it had NT$2.10b in cash and NT$1.03b in receivables that were due within 12 months. So it has liabilities totalling NT$1.82b more than its cash and near-term receivables, combined.

Kenmec Mechanical Engineering has a market capitalization of NT$6.70b, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. While it does have liabilities worth noting, Kenmec Mechanical Engineering also has more cash than debt, so we’re pretty confident it can manage its debt safely. There’s no doubt that we learn most about debt from the balance sheet. But it is Kenmec Mechanical Engineering’s earnings that will influence how the balance sheet holds up in the future. 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.

In the last year Kenmec Mechanical Engineering’s revenue was pretty flat, and it made a negative EBIT. While that hardly impresses, its not too bad either.

So How Risky Is Kenmec Mechanical Engineering?

While Kenmec Mechanical Engineering lost money on an earnings before interest and tax (EBIT) level, it actually generated positive free cash flow NT$149m. So although it is loss-making, it doesn’t seem to have too much near-term balance sheet risk, keeping in mind the net cash. With revenue growth uninspiring, we’d really need to see some positive EBIT before mustering much enthusiasm for this business. 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. We’ve identified 1 warning sign with Kenmec Mechanical Engineering , and understanding them should be part of your investment process.

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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