Health Check: How Prudently Does Nan Ren Lake Leisure Amusement (GTSM:5905) Use Debt?

Legendary fund manager Li Lu (who Charlie Munger backed) once said, '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 Nan Ren Lake Leisure Amusement Co., Ltd. (GTSM:5905) does have debt on its balance sheet. But is this debt a concern to shareholders?

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. 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. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for Nan Ren Lake Leisure Amusement

What Is Nan Ren Lake Leisure Amusement's Debt?

You can click the graphic below for the historical numbers, but it shows that as of December 2020 Nan Ren Lake Leisure Amusement had NT$892.1m of debt, an increase on NT$289.1m, over one year. However, it does have NT$1.30b in cash offsetting this, leading to net cash of NT$404.3m.

How Healthy Is Nan Ren Lake Leisure Amusement's Balance Sheet?

According to the last reported balance sheet, Nan Ren Lake Leisure Amusement had liabilities of NT$1.55b due within 12 months, and liabilities of NT$121.2m due beyond 12 months. On the other hand, it had cash of NT$1.30b and NT$89.0m worth of receivables due within a year. So its liabilities total NT$286.3m more than the combination of its cash and short-term receivables.

Since publicly traded Nan Ren Lake Leisure Amusement shares are worth a total of NT$2.31b, it seems unlikely that this level of liabilities would be a major threat. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. Despite its noteworthy liabilities, Nan Ren Lake Leisure Amusement boasts net cash, so it's fair to say it does not have a heavy debt load! 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 Nan Ren Lake Leisure Amusement 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 Nan Ren Lake Leisure Amusement had a loss before interest and tax, and actually shrunk its revenue by 13%, to NT$1.2b. We would much prefer see growth.

So How Risky Is Nan Ren Lake Leisure Amusement?

Although Nan Ren Lake Leisure Amusement had an earnings before interest and tax (EBIT) loss over the last twelve months, it made a statutory profit of NT$49m. So taking that on face value, and considering the cash, we don't think its very risky in the near term. With revenue growth uninspiring, we'd really need to see some positive EBIT before mustering much enthusiasm for this business. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. For example, we've discovered 3 warning signs for Nan Ren Lake Leisure Amusement (1 makes us a bit uncomfortable!) that you should be aware of before investing here.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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