Is Astro (GTSM:3064) Using Too Much Debt?

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.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. We note that Astro Corporation (GTSM:3064) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

When Is Debt Dangerous?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. If things get really bad, the lenders can take control of the business. 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.

View our latest analysis for Astro

How Much Debt Does Astro Carry?

You can click the graphic below for the historical numbers, but it shows that as of September 2020 Astro had NT$380.0m of debt, an increase on NT$180.0m, over one year. However, it does have NT$152.3m in cash offsetting this, leading to net debt of about NT$227.7m.

How Healthy Is Astro's Balance Sheet?

According to the last reported balance sheet, Astro had liabilities of NT$239.9m due within 12 months, and liabilities of NT$223.2m due beyond 12 months. Offsetting these obligations, it had cash of NT$152.3m as well as receivables valued at NT$38.8m due within 12 months. So it has liabilities totalling NT$271.9m more than its cash and near-term receivables, combined.

This deficit isn't so bad because Astro is worth NT$655.1m, 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 Astro 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, Astro reported revenue of NT$287m, which is a gain of 46%, although it did not report any earnings before interest and tax. With any luck the company will be able to grow its way to profitability.

Caveat Emptor

While we can certainly appreciate Astro's revenue growth, its earnings before interest and tax (EBIT) loss is not ideal. Its EBIT loss was a whopping NT$168m. 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. Another cause for caution is that is bled NT$126m in negative free cash flow over the last twelve months. So suffice it to say we consider the stock very risky. 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. For instance, we've identified 4 warning signs for Astro (2 make us uncomfortable) you should be aware of.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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