Polylite Taiwan (GTSM:1813) Is Carrying A Fair Bit Of 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. We note that Polylite Taiwan Co., Ltd. (GTSM:1813) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

What Risk Does Debt Bring?

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. 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. 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. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for Polylite Taiwan

What Is Polylite Taiwan's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of September 2020 Polylite Taiwan had NT$283.7m of debt, an increase on NT$75.9m, over one year. However, it does have NT$159.3m in cash offsetting this, leading to net debt of about NT$124.4m.

A Look At Polylite Taiwan's Liabilities

We can see from the most recent balance sheet that Polylite Taiwan had liabilities of NT$345.0m falling due within a year, and liabilities of NT$29.2m due beyond that. On the other hand, it had cash of NT$159.3m and NT$96.7m worth of receivables due within a year. So its liabilities total NT$118.3m more than the combination of its cash and short-term receivables.

Given Polylite Taiwan has a market capitalization of NT$900.1m, it's hard to believe these liabilities pose much threat. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. There's no doubt that we learn most about debt from the balance sheet. But it is Polylite Taiwan'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 Polylite Taiwan had a loss before interest and tax, and actually shrunk its revenue by 22%, to NT$409m. That makes us nervous, to say the least.

Caveat Emptor

Not only did Polylite Taiwan's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). To be specific the EBIT loss came in at NT$58m. 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$92m in negative free cash flow over the last twelve months. So suffice it to say we consider the stock very 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. Like risks, for instance. Every company has them, and we've spotted 3 warning signs for Polylite Taiwan (of which 1 is potentially serious!) you should know about.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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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