Health Check: How Prudently Does Kee Song Bio-Technology Holdings (GTSM:1258) 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.' 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. Importantly, Kee Song Bio-Technology Holdings Limited (GTSM:1258) does carry debt. But the more important question is: how much risk is that debt creating?

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. If things get really bad, the lenders can take control of the business. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for Kee Song Bio-Technology Holdings

How Much Debt Does Kee Song Bio-Technology Holdings Carry?

As you can see below, Kee Song Bio-Technology Holdings had NT$1.49b of debt, at September 2020, which is about the same as the year before. You can click the chart for greater detail. However, it does have NT$380.3m in cash offsetting this, leading to net debt of about NT$1.11b.

How Healthy Is Kee Song Bio-Technology Holdings's Balance Sheet?

The latest balance sheet data shows that Kee Song Bio-Technology Holdings had liabilities of NT$1.06b due within a year, and liabilities of NT$912.3m falling due after that. Offsetting these obligations, it had cash of NT$380.3m as well as receivables valued at NT$226.2m due within 12 months. So its liabilities total NT$1.36b more than the combination of its cash and short-term receivables.

The deficiency here weighs heavily on the NT$592.8m company itself, as if a child were struggling under the weight of an enormous back-pack full of books, his sports gear, and a trumpet. So we definitely think shareholders need to watch this one closely. After all, Kee Song Bio-Technology Holdings would likely require a major re-capitalisation if it had to pay its creditors today. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Kee Song Bio-Technology Holdings will need earnings to service that debt. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

Over 12 months, Kee Song Bio-Technology Holdings made a loss at the EBIT level, and saw its revenue drop to NT$2.7b, which is a fall of 9.4%. We would much prefer see growth.

Caveat Emptor

Importantly, Kee Song Bio-Technology Holdings had an earnings before interest and tax (EBIT) loss over the last year. To be specific the EBIT loss came in at NT$46m. 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$56m. And until that time we think this is a risky stock. 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. Consider for instance, the ever-present spectre of investment risk. We've identified 3 warning signs with Kee Song Bio-Technology Holdings (at least 2 which don't sit too well with us) , and understanding them should be part of your investment process.

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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