News Highlights: Is Dimension Computer Technology (GTSM:6140) Using Too Much Debt?.
Howard Marks put it nicely when he said that instead of worrying about stock price volatility, “ the possibility of permanent loss is the risk I worry about … and that every practical investor I know , is worried. ‘ It is only natural to consider a company’s balance sheet when examining how risky it is, as debt often occurs when a company collapses. We can see that Dimension Computer Technology Co., Ltd. (GTSM: 6140) uses debt in her business. But the real question is whether this debt makes the business risky.
When is guilt dangerous?
Debt assists a company until it has trouble paying it off, either with new capital or with free cash flow. When things get really bad, the lenders can take control of the business. A more common (but still costly) occurrence, however, is that a company has to issue shares at bargain prices, permanently diluting shareholders just to keep its balance sheet up. Debt can of course be an important tool in businesses, especially capital-heavy businesses. When we examine debt levels, we first look at both cash and debt levels together.
Check out our latest analysis for Dimension Computer Technology
What is Dimension Computer Technologynet debt?
The image below, which you can click for more details, shows that Dimension Computer Technology was in debt of NT $ 118.8 million at the end of September 2020, a reduction of NT $ 221.4 million in one year. However, it also had NT $ 93.2 million in cash, so its net debt is NT $ 25.6 million.
GTSM: 6140 History of Debts to Equity January 26, 2021 How Strong Is Dimension Computer TechnologyBalans?
According to the last reported balance, Dimension Computer Technology had debts of NT $ 699.0 million within 12 months, and debt of NT $ 15.9 million after more than 12 months. To offset these commitments, it had cash of NT $ 93.2 million and receivables worth NT $ 748.3 million within 12 months. Thus, it boasts NT $ 126.7 million more cash than its total liabilities.
This surplus suggests that Dimension Computer Technology uses debt in a way that appears both safe and conservative. Since it easily has sufficient short-term liquidity, we don’t think it will have any problems with its lenders.
We use two main ratios to inform ourselves about the level of debt to earnings. The first is net debt divided by earnings before interest, taxes, depreciation and amortization (EBITDA), while the second is how many times earnings before interest and taxes (EBIT) cover the interest expense (or interest coverage for short). In this way, we look at both the absolute amount of the debt and the interest rates paid on it.
Size computer Technology Net debt is only 0.29 times EBITDA. And his EBIT easily covers his interest expense, which is 93.5 times that. So we’re pretty relaxed about the super conservative use of debt. Better yet, Dimension Computer Technology EBIT grew by 1,643% last year, which is an impressive improvement. If maintained, this growth will make the debt even more manageable in the coming years. There is no doubt that we learn the most about debt from the balance sheet. But you cannot view debt in total isolation; since Dimension Computer Technology will need income to pay off that debt. So if you are considering debt, it is certainly worth looking at the earnings development. Click here for an interactive snapshot.
But our final consideration is also important, because a company cannot pay off debt with paper profits; it desperately needs money. So we have to see clearly whether that EBIT leads to a corresponding free cash flow. For the past three years, Dimension Computer Technology actually produced more free cash flow than EBIT. That kind of strong cash generation warms our hearts like a puppy in a bumblebee suit.
Fortunately, Dimension Computer Technology’s impressive interest coverage implies it has the upper hand over its debt. And that’s just the beginning of the good news, as the conversion from EBIT to free cash flow is also very encouraging. It looks like Dimension Computer Technology has no qualms about standing on his own two feet and has no reason to fear his lenders. For investing nerds like us, the balance sheet is almost charming. When analyzing debt levels, balance sheet is the obvious place to start. Ultimately, however, any business can involve off-balance sheet risks. Keep in mind that Dimension Computer Technology shows 2 warning signs in our investment analysis, you should know about …
If you’re interested in investing in companies that can make a profit without debt, check out this free list of growing companies that have net cash on their balance sheet.
If you decide to trade Dimension Computer Technology, use the cheapest * platform rated # 1 by Barron, Interactive brokers. Trade stocks, options, futures, forex, bonds and funds in 135 markets, all from one integrated account.
This article from Simply Wall St is general in nature. It is not a recommendation to buy or sell stock, and does not take into account your goals or your financial situation. We strive to provide you with long-term focused analysis based on fundamental data. Note that our analysis may not take into account the latest price sensitive company announcements or quality material. Simply Wall St has no exposure to said stocks. * Interactive Brokers Rated Lowest Cost Broker by StockBrokers.com Annual Online Review 2020
Do you have any feedback on this article? Concerned about the content? Contact us directly. You can also email the editorial team (at) Simplywallst.com.