Here's Why Tekho Marine Biotech (GTSM:8465) Can Afford Some Debt

Warren Buffett famously said, '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, Tekho Marine Biotech Co., Ltd (GTSM:8465) does carry debt. But the real question is whether this debt is making the company risky.

When Is Debt A Problem?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. 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.

See our latest analysis for Tekho Marine Biotech

How Much Debt Does Tekho Marine Biotech Carry?

As you can see below, Tekho Marine Biotech had NT$48.9m of debt at December 2020, down from NT$100.2m a year prior. However, it also had NT$6.27m in cash, and so its net debt is NT$42.6m.

How Healthy Is Tekho Marine Biotech's Balance Sheet?

The latest balance sheet data shows that Tekho Marine Biotech had liabilities of NT$76.5m due within a year, and liabilities of NT$15.9m falling due after that. On the other hand, it had cash of NT$6.27m and NT$11.8m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by NT$74.3m.

Tekho Marine Biotech has a market capitalization of NT$154.4m, so it could very likely raise cash to ameliorate 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. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Tekho Marine Biotech 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, Tekho Marine Biotech made a loss at the EBIT level, and saw its revenue drop to NT$77m, which is a fall of 52%. That makes us nervous, to say the least.

Caveat Emptor

While Tekho Marine Biotech's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. Indeed, it lost NT$11m at the EBIT level. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. Another cause for caution is that is bled NT$8.9m in negative free cash flow over the last twelve months. So in short it's a really risky stock. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. For example, we've discovered 4 warning signs for Tekho Marine Biotech (3 make us uncomfortable!) that you should be aware of before investing here.

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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