Does Da Lue International Holding (GTSM:4804) Have A Healthy Balance Sheet?

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.' 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 note that Da Lue International Holding Company Limited (GTSM:4804) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. 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 Da Lue International Holding

What Is Da Lue International Holding's Net Debt?

You can click the graphic below for the historical numbers, but it shows that Da Lue International Holding had NT$109.0m of debt in September 2020, down from NT$230.9m, one year before. However, because it has a cash reserve of NT$11.8m, its net debt is less, at about NT$97.1m.

How Strong Is Da Lue International Holding's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Da Lue International Holding had liabilities of NT$272.8m due within 12 months and liabilities of NT$626.5m due beyond that. Offsetting this, it had NT$11.8m in cash and NT$176.6m in receivables that were due within 12 months. So its liabilities total NT$710.9m more than the combination of its cash and short-term receivables.

Given this deficit is actually higher than the company's market capitalization of NT$644.4m, we think shareholders really should watch Da Lue International Holding's debt levels, like a parent watching their child ride a bike for the first time. Hypothetically, extremely heavy dilution would be required if the company were forced to pay down its liabilities by raising capital at the current share price. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Da Lue International Holding 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, Da Lue International Holding made a loss at the EBIT level, and saw its revenue drop to NT$324m, which is a fall of 23%. To be frank that doesn't bode well.

Caveat Emptor

Not only did Da Lue International Holding's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). Indeed, it lost NT$18m at the EBIT level. When we look at that alongside the significant liabilities, we're not particularly confident about the company. We'd want to see some strong near-term improvements before getting too interested in the stock. For example, we would not want to see a repeat of last year's loss of NT$3.3m. In the meantime, we consider the stock to be risky. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. To that end, you should learn about the 2 warning signs we've spotted with Da Lue International Holding (including 1 which can't be ignored) .

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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