Ideal Bike (GTSM:8933) Is Making Moderate Use Of 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.' 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 can see that Ideal Bike Corporation (GTSM:8933) does use debt in its business. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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, debt can be an important tool in businesses, particularly capital heavy businesses. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for Ideal Bike

How Much Debt Does Ideal Bike Carry?

You can click the graphic below for the historical numbers, but it shows that Ideal Bike had NT$1.84b of debt in September 2020, down from NT$2.57b, one year before. On the flip side, it has NT$842.3m in cash leading to net debt of about NT$995.7m.

How Healthy Is Ideal Bike's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Ideal Bike had liabilities of NT$2.12b due within 12 months and liabilities of NT$872.8m due beyond that. Offsetting this, it had NT$842.3m in cash and NT$1.02b in receivables that were due within 12 months. So it has liabilities totalling NT$1.13b more than its cash and near-term receivables, combined.

Ideal Bike has a market capitalization of NT$2.87b, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. However, it is still worthwhile taking a close look at its ability to pay off debt. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Ideal Bike 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.

In the last year Ideal Bike wasn't profitable at an EBIT level, but managed to grow its revenue by 17%, to NT$4.3b. We usually like to see faster growth from unprofitable companies, but each to their own.

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$55m. 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. On the bright side, we note that trailing twelve month EBIT is worse than the free cash flow of NT$488m and the profit of NT$80m. 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. Take risks, for example - Ideal Bike has 2 warning signs (and 1 which shouldn't be ignored) we think you should know about.

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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