Is Everest Textile (TPE:1460) A Risky Investment?

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a 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 Everest Textile Co., Ltd. (TPE:1460) does use debt in its business. But is this debt a concern to shareholders?

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. 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, debt can be an important tool in businesses, particularly capital heavy businesses. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

View our latest analysis for Everest Textile

How Much Debt Does Everest Textile Carry?

You can click the graphic below for the historical numbers, but it shows that as of September 2020 Everest Textile had NT$7.48b of debt, an increase on NT$6.45b, over one year. However, it does have NT$682.1m in cash offsetting this, leading to net debt of about NT$6.79b.

A Look At Everest Textile's Liabilities

According to the last reported balance sheet, Everest Textile had liabilities of NT$5.55b due within 12 months, and liabilities of NT$3.77b due beyond 12 months. On the other hand, it had cash of NT$682.1m and NT$1.13b worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by NT$7.50b.

This deficit casts a shadow over the NT$4.60b company, like a colossus towering over mere mortals. So we definitely think shareholders need to watch this one closely. After all, Everest Textile would likely require a major re-capitalisation if it had to pay its creditors today. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Everest Textile 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 Everest Textile had a loss before interest and tax, and actually shrunk its revenue by 19%, to NT$7.3b. That's not what we would hope to see.

Caveat Emptor

While Everest Textile's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. Its EBIT loss was a whopping NT$486m. When we look at that alongside the significant liabilities, we're not particularly confident about the company. It would need to improve its operations quickly for us to be interested in it. Not least because it burned through NT$596m in negative free cash flow over the last year. So suffice it to say we consider the stock to be risky. 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. Take risks, for example - Everest Textile has 2 warning signs we think you should be aware of.

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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