Does TERA SCIENCELTD (KOSDAQ:073640) Have A Healthy Balance Sheet?

Warren Buffett famously said, '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. As with many other companies TERA SCIENCE Co.,LTD (KOSDAQ:073640) makes use of debt. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

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. If things get really bad, the lenders can take control of the business. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. 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 TERA SCIENCELTD

What Is TERA SCIENCELTD's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of September 2020 TERA SCIENCELTD had ₩21.7b of debt, an increase on ₩17.8b, over one year. However, because it has a cash reserve of ₩21.0b, its net debt is less, at about ₩728.7m.

How Strong Is TERA SCIENCELTD's Balance Sheet?

According to the last reported balance sheet, TERA SCIENCELTD had liabilities of ₩14.7b due within 12 months, and liabilities of ₩14.0b due beyond 12 months. Offsetting this, it had ₩21.0b in cash and ₩3.19b in receivables that were due within 12 months. So its liabilities total ₩4.48b more than the combination of its cash and short-term receivables.

Of course, TERA SCIENCELTD has a market capitalization of ₩125.7b, so these liabilities are probably manageable. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. But either way, TERA SCIENCELTD has virtually no net debt, so it's fair to say it does not have a heavy debt load! When analysing debt levels, the balance sheet is the obvious place to start. But it is TERA SCIENCELTD'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.

Over 12 months, TERA SCIENCELTD made a loss at the EBIT level, and saw its revenue drop to ₩14b, which is a fall of 21%. That makes us nervous, to say the least.

Caveat Emptor

Not only did TERA SCIENCELTD's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). Indeed, it lost ₩1.8b at the EBIT level. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. Another cause for caution is that is bled ₩746m in negative free cash flow over the last twelve months. So to be blunt we think it is risky. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. Case in point: We've spotted 1 warning sign for TERA SCIENCELTD you should be aware of.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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