Health Check: How Prudently Does Kee Song Bio-Technology Holdings (GTSM:1258) Use Debt?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. As with many other companies Kee Song Bio-Technology Holdings Limited (GTSM:1258) makes use of debt. But the more important question is: how much risk is that debt creating?

What Risk Does Debt Bring?

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. 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. 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.

See our latest analysis for Kee Song Bio-Technology Holdings

What Is Kee Song Bio-Technology Holdings's Debt?

The chart below, which you can click on for greater detail, shows that Kee Song Bio-Technology Holdings had NT$1.49b in debt in September 2020; about the same as the year before. On the flip side, it has NT$380.3m in cash leading to net debt of about NT$1.11b.

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

According to the last reported balance sheet, Kee Song Bio-Technology Holdings had liabilities of NT$1.06b due within 12 months, and liabilities of NT$912.3m due beyond 12 months. Offsetting this, it had NT$380.3m in cash and NT$226.2m in receivables that were due within 12 months. So it has liabilities totalling NT$1.36b more than its cash and near-term receivables, combined.

The deficiency here weighs heavily on the NT$605.7m 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. At the end of the day, Kee Song Bio-Technology Holdings would probably need a major re-capitalization if its creditors were to demand repayment. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Kee Song Bio-Technology Holdings 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 Kee Song Bio-Technology Holdings had a loss before interest and tax, and actually shrunk its revenue by 9.4%, to NT$2.7b. That's not what we would hope to see.

Caveat Emptor

Over the last twelve months Kee Song Bio-Technology Holdings produced an earnings before interest and tax (EBIT) loss. To be specific the EBIT loss came in at NT$46m. Considering that alongside the liabilities mentioned above make us nervous about the company. We'd want to see some strong near-term improvements before getting too interested in the stock. It's fair to say the loss of NT$56m didn't encourage us either; we'd like to see a profit. In the meantime, we consider the stock to be risky. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. Case in point: We've spotted 3 warning signs for Kee Song Bio-Technology Holdings you should be aware of, and 2 of them are a bit unpleasant.

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.

If you decide to trade Kee Song Bio-Technology Holdings, use the lowest-cost* platform that is rated #1 Overall by Barron’s, Interactive Brokers. Trade stocks, options, futures, forex, bonds and funds on 135 markets, all from a single integrated account. Promoted

This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.
^*Interactive Brokers Rated Lowest Cost Broker by StockBrokers.com Annual Online Review 2020

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.