Is Lion Travel Service (TPE:2731) Using Too Much Debt?

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' 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. Importantly, Lion Travel Service Co., Ltd. (TPE:2731) does carry debt. But the real question is whether this debt is making the company risky.

When Is Debt A Problem?

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. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for Lion Travel Service

How Much Debt Does Lion Travel Service Carry?

As you can see below, at the end of September 2020, Lion Travel Service had NT$1.75b of debt, up from NT$25.8m a year ago. Click the image for more detail. But it also has NT$3.59b in cash to offset that, meaning it has NT$1.84b net cash.

How Strong Is Lion Travel Service's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Lion Travel Service had liabilities of NT$2.21b due within 12 months and liabilities of NT$2.87b due beyond that. Offsetting these obligations, it had cash of NT$3.59b as well as receivables valued at NT$194.0m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by NT$1.30b.

This deficit isn't so bad because Lion Travel Service is worth NT$5.05b, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. But it's clear that we should definitely closely examine whether it can manage its debt without dilution. While it does have liabilities worth noting, Lion Travel Service also has more cash than debt, so we're pretty confident it can manage its debt safely. When analysing debt levels, the balance sheet is the obvious place to start. But it is Lion Travel Service's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

In the last year Lion Travel Service had a loss before interest and tax, and actually shrunk its revenue by 57%, to NT$13b. To be frank that doesn't bode well.

So How Risky Is Lion Travel Service?

Statistically speaking companies that lose money are riskier than those that make money. And in the last year Lion Travel Service had an earnings before interest and tax (EBIT) loss, truth be told. Indeed, in that time it burnt through NT$1.7b of cash and made a loss of NT$283m. Given it only has net cash of NT$1.84b, the company may need to raise more capital if it doesn't reach break-even soon. Summing up, we're a little skeptical of this one, as it seems fairly risky in the absence of free cashflow. 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. For example, we've discovered 3 warning signs for Lion Travel Service (2 shouldn't be ignored!) that you should be aware of before investing here.

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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