Does Ideal Bike (GTSM:8933) Have A Healthy Balance Sheet?

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. We can see that Ideal Bike Corporation (GTSM:8933) does use debt in its business. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

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, plenty of companies use debt to fund growth, without any negative consequences. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for Ideal Bike

What Is Ideal Bike's Debt?

You can click the graphic below for the historical numbers, but it shows that Ideal Bike had NT$1.75b of debt in December 2020, down from NT$2.33b, one year before. However, it also had NT$793.3m in cash, and so its net debt is NT$958.1m.

A Look At Ideal Bike's Liabilities

The latest balance sheet data shows that Ideal Bike had liabilities of NT$2.46b due within a year, and liabilities of NT$622.6m falling due after that. Offsetting this, it had NT$793.3m in cash and NT$782.8m in receivables that were due within 12 months. So it has liabilities totalling NT$1.51b more than its cash and near-term receivables, combined.

While this might seem like a lot, it is not so bad since Ideal Bike has a market capitalization of NT$3.16b, and so it could probably strengthen its balance sheet by raising capital if it needed to. But it's clear that we should definitely closely examine whether it can manage its debt without dilution. 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 Ideal Bike 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 Ideal Bike's revenue was pretty flat, and it made a negative EBIT. While that hardly impresses, its not too bad either.

Caveat Emptor

Importantly, Ideal Bike had an earnings before interest and tax (EBIT) loss over the last year. To be specific the EBIT loss came in at NT$41m. 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. Surprisingly, we note that it actually reported positive free cash flow of NT$529m and a profit of NT$11m. So one might argue that there's still a chance it can get things on the right track. 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. To that end, you should be aware of the 2 warning signs we've spotted with Ideal Bike .

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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