We Think TopGreen Technology (GTSM:1585) Has A Fair Chunk 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.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. As with many other companies TopGreen Technology Co., Ltd. (GTSM:1585) makes use of debt. But is this debt a concern to shareholders?

When Is Debt Dangerous?

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. If things get really bad, the lenders can take control of the business. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. 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 TopGreen Technology

How Much Debt Does TopGreen Technology Carry?

As you can see below, at the end of December 2020, TopGreen Technology had NT$657.0m of debt, up from NT$612.0m a year ago. Click the image for more detail. On the flip side, it has NT$74.0m in cash leading to net debt of about NT$583.1m.

How Strong Is TopGreen Technology's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that TopGreen Technology had liabilities of NT$48.1m due within 12 months and liabilities of NT$701.3m due beyond that. On the other hand, it had cash of NT$74.0m and NT$49.3m worth of receivables due within a year. So its liabilities total NT$626.1m more than the combination of its cash and short-term receivables.

This deficit is considerable relative to its market capitalization of NT$898.3m, so it does suggest shareholders should keep an eye on TopGreen Technology's use of debt. Should its lenders demand that it shore up the balance sheet, shareholders would likely face severe dilution. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since TopGreen 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, TopGreen Technology made a loss at the EBIT level, and saw its revenue drop to NT$128m, which is a fall of 28%. To be frank that doesn't bode well.

Caveat Emptor

While TopGreen Technology's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. Its EBIT loss was a whopping NT$111m. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. So we think its balance sheet is a little strained, though not beyond repair. Another cause for caution is that is bled NT$16m in negative free cash flow over the last twelve months. So to be blunt we think it is risky. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. For example TopGreen Technology has 4 warning signs (and 1 which is concerning) we think you should know about.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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