Kaison Green Energy Technology (GTSM:2246) Is Carrying A Fair Bit Of Debt

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.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. We can see that Kaison Green Energy Technology Co., LTD (GTSM:2246) does use debt in its business. But should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. 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. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for Kaison Green Energy Technology

What Is Kaison Green Energy Technology's Net Debt?

The image below, which you can click on for greater detail, shows that at June 2020 Kaison Green Energy Technology had debt of NT$449.8m, up from NT$326.6m in one year. However, it does have NT$44.1m in cash offsetting this, leading to net debt of about NT$405.6m.

How Strong Is Kaison Green Energy Technology's Balance Sheet?

We can see from the most recent balance sheet that Kaison Green Energy Technology had liabilities of NT$247.6m falling due within a year, and liabilities of NT$408.9m due beyond that. Offsetting these obligations, it had cash of NT$44.1m as well as receivables valued at NT$447.5m due within 12 months. So its liabilities total NT$164.8m more than the combination of its cash and short-term receivables.

Given Kaison Green Energy Technology has a market capitalization of NT$1.17b, it's hard to believe these liabilities pose much threat. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Kaison Green Energy Technology will need earnings to service that debt. 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, Kaison Green Energy Technology saw its revenue hold pretty steady, and it did not report positive earnings before interest and tax. While that's not too bad, we'd prefer see growth.

Caveat Emptor

Importantly, Kaison Green Energy Technology had an earnings before interest and tax (EBIT) loss over the last year. To be specific the EBIT loss came in at NT$89m. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any 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 NT$261m in negative free cash flow over the last twelve months. So in short it's a really risky stock. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. For example, we've discovered 4 warning signs for Kaison Green Energy Technology (2 can't be ignored!) that you should be aware of before investing here.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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