In This Article:
David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' 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, GT Steel Construction Group Limited (HKG:8402) does carry debt. But the real question is whether this debt is making the company risky.
What Risk Does Debt Bring?
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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. The first step when considering a company's debt levels is to consider its cash and debt together.
Check out our latest analysis for GT Steel Construction Group
What Is GT Steel Construction Group's Debt?
As you can see below, GT Steel Construction Group had S$3.57m of debt at June 2019, down from S$3.82m a year prior. But on the other hand it also has S$6.99m in cash, leading to a S$3.42m net cash position.
How Healthy Is GT Steel Construction Group's Balance Sheet?
We can see from the most recent balance sheet that GT Steel Construction Group had liabilities of S$9.82m falling due within a year, and liabilities of S$1.40m due beyond that. Offsetting this, it had S$6.99m in cash and S$25.5m in receivables that were due within 12 months. So it actually has S$21.3m more liquid assets than total liabilities.
This luscious liquidity implies that GT Steel Construction Group's balance sheet is sturdy like a giant sequoia tree. With this in mind one could posit that its balance sheet is as strong as beautiful a rare rhino. Simply put, the fact that GT Steel Construction Group has more cash than debt is arguably a good indication that it can manage its debt safely.
On top of that, GT Steel Construction Group grew its EBIT by 40% over the last twelve months, and that growth will make it easier to handle its debt. There's no doubt that we learn most about debt from the balance sheet. But it is GT Steel Construction Group's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.