Is GEM Terminal IndustryLtd (TPE:2460) A Risky Investment?

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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 note that GEM Terminal Industry Co.,Ltd. (TPE:2460) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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, plenty of companies use debt to fund growth, without any negative consequences. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for GEM Terminal IndustryLtd

How Much Debt Does GEM Terminal IndustryLtd Carry?

As you can see below, GEM Terminal IndustryLtd had NT$2.07b of debt at September 2020, down from NT$2.40b a year prior. However, it also had NT$1.30b in cash, and so its net debt is NT$761.8m.

How Healthy Is GEM Terminal IndustryLtd's Balance Sheet?

We can see from the most recent balance sheet that GEM Terminal IndustryLtd had liabilities of NT$2.26b falling due within a year, and liabilities of NT$775.4m due beyond that. On the other hand, it had cash of NT$1.30b and NT$1.17b worth of receivables due within a year. So it has liabilities totalling NT$558.1m more than its cash and near-term receivables, combined.

Since publicly traded GEM Terminal IndustryLtd shares are worth a total of NT$2.89b, it seems unlikely that this level of liabilities would be a major threat. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since GEM Terminal IndustryLtd 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 GEM Terminal IndustryLtd had a loss before interest and tax, and actually shrunk its revenue by 7.4%, to NT$3.3b. That's not what we would hope to see.

Caveat Emptor

Importantly, GEM Terminal IndustryLtd had an earnings before interest and tax (EBIT) loss over the last year. Indeed, it lost NT$37m at the EBIT level. 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. For example, we would not want to see a repeat of last year's loss of NT$195m. In the meantime, we consider the stock very risky. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. For example, we've discovered 2 warning signs for GEM Terminal IndustryLtd (1 shouldn't be ignored!) that you should be aware of before investing here.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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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