Would Taiwan Environment Scientific (GTSM:8476) Be Better Off With Less 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 Taiwan Environment Scientific Co., Ltd. (GTSM:8476) makes use of debt. But the real question is whether this debt is making the company risky.

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. 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 thing to do when considering how much debt a business uses is to look at its cash and debt together.

See our latest analysis for Taiwan Environment Scientific

How Much Debt Does Taiwan Environment Scientific Carry?

You can click the graphic below for the historical numbers, but it shows that as of September 2020 Taiwan Environment Scientific had NT$543.6m of debt, an increase on NT$511.8m, over one year. However, it does have NT$42.2m in cash offsetting this, leading to net debt of about NT$501.5m.

How Strong Is Taiwan Environment Scientific's Balance Sheet?

According to the last reported balance sheet, Taiwan Environment Scientific had liabilities of NT$651.0m due within 12 months, and liabilities of NT$257.7m due beyond 12 months. Offsetting this, it had NT$42.2m in cash and NT$385.6m in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by NT$481.0m.

This deficit isn't so bad because Taiwan Environment Scientific is worth NT$1.29b, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. However, it is still worthwhile taking a close look at its ability to pay off debt. The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since Taiwan Environment Scientific will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Over 12 months, Taiwan Environment Scientific reported revenue of NT$544m, which is a gain of 128%, although it did not report any earnings before interest and tax. So there's no doubt that shareholders are cheering for growth

Caveat Emptor

Despite the top line growth, Taiwan Environment Scientific still had an earnings before interest and tax (EBIT) loss over the last year. To be specific the EBIT loss came in at NT$58m. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. However, it doesn't help that it burned through NT$57m of cash over the last year. So to be blunt we think it is risky. 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. Take risks, for example - Taiwan Environment Scientific has 3 warning signs (and 2 which are a bit unpleasant) we think you should know about.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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