Is Xu Yuan Packaging Technology (GTSM:8421) Weighed On By Its Debt Load?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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 Xu Yuan Packaging Technology Co., Ltd. (GTSM:8421) makes use of debt. But the more important question is: how much risk is that debt creating?

What Risk Does Debt Bring?

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. 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. 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. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for Xu Yuan Packaging Technology

How Much Debt Does Xu Yuan Packaging Technology Carry?

As you can see below, at the end of September 2020, Xu Yuan Packaging Technology had NT$1.54b of debt, up from NT$1.41b a year ago. Click the image for more detail. However, it does have NT$209.8m in cash offsetting this, leading to net debt of about NT$1.33b.

How Healthy Is Xu Yuan Packaging Technology's Balance Sheet?

According to the last reported balance sheet, Xu Yuan Packaging Technology had liabilities of NT$510.6m due within 12 months, and liabilities of NT$1.28b due beyond 12 months. Offsetting these obligations, it had cash of NT$209.8m as well as receivables valued at NT$346.4m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by NT$1.23b.

The deficiency here weighs heavily on the NT$523.0m company itself, as if a child were struggling under the weight of an enormous back-pack full of books, his sports gear, and a trumpet. So we definitely think shareholders need to watch this one closely. After all, Xu Yuan Packaging Technology would likely require a major re-capitalisation if it had to pay its creditors today. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Xu Yuan Packaging 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.

In the last year Xu Yuan Packaging Technology had a loss before interest and tax, and actually shrunk its revenue by 8.5%, to NT$1.2b. That's not what we would hope to see.

Caveat Emptor

Importantly, Xu Yuan Packaging Technology had an earnings before interest and tax (EBIT) loss over the last year. Indeed, it lost NT$3.8m at the EBIT level. When we look at that alongside the significant liabilities, we're not particularly confident about the company. We'd want to see some strong near-term improvements before getting too interested in the stock. Not least because it burned through NT$160m in negative free cash flow over the last year. That means it's on the risky side of things. 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. Case in point: We've spotted 2 warning signs for Xu Yuan Packaging Technology you should be aware of, and 1 of them is potentially serious.

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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