Is Oceanic Beverages (TPE:1213) A Risky Investment?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. As with many other companies Oceanic Beverages Co., Inc. (TPE:1213) makes use of debt. But should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

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. 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for Oceanic Beverages

What Is Oceanic Beverages's Net Debt?

As you can see below, Oceanic Beverages had NT$604.0m of debt, at September 2020, which is about the same as the year before. You can click the chart for greater detail. Net debt is about the same, since the it doesn't have much cash.

How Strong Is Oceanic Beverages' Balance Sheet?

According to the last reported balance sheet, Oceanic Beverages had liabilities of NT$497.6m due within 12 months, and liabilities of NT$238.7m due beyond 12 months. Offsetting these obligations, it had cash of NT$10.00m as well as receivables valued at NT$214.5m due within 12 months. So its liabilities total NT$511.8m more than the combination of its cash and short-term receivables.

When you consider that this deficiency exceeds the company's NT$393.0m market capitalization, you might well be inclined to review the balance sheet intently. Hypothetically, extremely heavy dilution would be required if the company were forced to pay down its liabilities by raising capital at the current share price. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Oceanic Beverages's earnings that will influence how the balance sheet holds up in the future. 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.

In the last year Oceanic Beverages had a loss before interest and tax, and actually shrunk its revenue by 9.0%, to NT$407m. We would much prefer see growth.

Caveat Emptor

Importantly, Oceanic Beverages had an earnings before interest and tax (EBIT) loss over the last year. Indeed, it lost a very considerable NT$51m at the EBIT level. 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. Not least because it burned through NT$25m in negative free cash flow over the last year. That means it's on the risky side of things. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. Case in point: We've spotted 4 warning signs for Oceanic Beverages you should be aware of, and 2 of them make us uncomfortable.

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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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.
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