Does Top High Image (GTSM:3284) Have A Healthy 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.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. We note that Top High Image Corp. (GTSM:3284) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

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. 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 Top High Image

What Is Top High Image's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of September 2020 Top High Image had NT$504.7m of debt, an increase on NT$420.6m, over one year. However, because it has a cash reserve of NT$134.8m, its net debt is less, at about NT$369.8m.

A Look At Top High Image's Liabilities

We can see from the most recent balance sheet that Top High Image had liabilities of NT$390.0m falling due within a year, and liabilities of NT$209.5m due beyond that. On the other hand, it had cash of NT$134.8m and NT$310.8m worth of receivables due within a year. So it has liabilities totalling NT$153.9m more than its cash and near-term receivables, combined.

Top High Image has a market capitalization of NT$706.9m, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. There's no doubt that we learn most about debt from the balance sheet. But it is Top High Image's earnings that will influence how the balance sheet holds up in the future. 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 Top High Image had a loss before interest and tax, and actually shrunk its revenue by 13%, to NT$731m. We would much prefer see growth.

Caveat Emptor

Not only did Top High Image's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). Its EBIT loss was a whopping NT$99m. 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. For example, we would not want to see a repeat of last year's loss of NT$82m. 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. Case in point: We've spotted 3 warning signs for Top High Image you should be aware of, and 1 of them doesn't sit too well with us.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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