Brighton-Best International (Taiwan) (GTSM:8415) Has A Somewhat Strained Balance Sheet

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a 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. We note that Brighton-Best International (Taiwan) Inc. (GTSM:8415) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

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 usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for Brighton-Best International (Taiwan)

How Much Debt Does Brighton-Best International (Taiwan) Carry?

You can click the graphic below for the historical numbers, but it shows that Brighton-Best International (Taiwan) had NT$8.43b of debt in December 2020, down from NT$9.00b, one year before. On the flip side, it has NT$3.90b in cash leading to net debt of about NT$4.53b.

How Healthy Is Brighton-Best International (Taiwan)'s Balance Sheet?

The latest balance sheet data shows that Brighton-Best International (Taiwan) had liabilities of NT$8.95b due within a year, and liabilities of NT$3.74b falling due after that. Offsetting these obligations, it had cash of NT$3.90b as well as receivables valued at NT$3.53b due within 12 months. So it has liabilities totalling NT$5.25b more than its cash and near-term receivables, combined.

Of course, Brighton-Best International (Taiwan) has a market capitalization of NT$29.7b, so these liabilities are probably manageable. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward.

We use two main ratios to inform us about debt levels relative to earnings. The first is net debt divided by earnings before interest, tax, depreciation, and amortization (EBITDA), while the second is how many times its earnings before interest and tax (EBIT) covers its interest expense (or its interest cover, for short). Thus we consider debt relative to earnings both with and without depreciation and amortization expenses.

Brighton-Best International (Taiwan) has net debt to EBITDA of 2.6 suggesting it uses a fair bit of leverage to boost returns. But the high interest coverage of 7.6 suggests it can easily service that debt. Importantly Brighton-Best International (Taiwan)'s EBIT was essentially flat over the last twelve months. We would prefer to see some earnings growth, because that always helps diminish debt. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Brighton-Best International (Taiwan) 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.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. So we clearly need to look at whether that EBIT is leading to corresponding free cash flow. During the last three years, Brighton-Best International (Taiwan) burned a lot of cash. While that may be a result of expenditure for growth, it does make the debt far more risky.

Our View

Brighton-Best International (Taiwan)'s conversion of EBIT to free cash flow was a real negative on this analysis, although the other factors we considered cast it in a significantly better light. But on the bright side, its ability to to cover its interest expense with its EBIT isn't too shabby at all. When we consider all the factors discussed, it seems to us that Brighton-Best International (Taiwan) is taking some risks with its use of debt. While that debt can boost returns, we think the company has enough leverage now. 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. These risks can be hard to spot. Every company has them, and we've spotted 2 warning signs for Brighton-Best International (Taiwan) 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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This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.
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