Bioteque (GTSM:4107) Has A Rock Solid Balance Sheet

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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. We note that Bioteque Corporation (GTSM:4107) 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 is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. 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 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 Bioteque

What Is Bioteque's Net Debt?

You can click the graphic below for the historical numbers, but it shows that Bioteque had NT$72.8m of debt in September 2020, down from NT$80.3m, one year before. However, its balance sheet shows it holds NT$1.32b in cash, so it actually has NT$1.25b net cash.

A Look At Bioteque's Liabilities

The latest balance sheet data shows that Bioteque had liabilities of NT$426.3m due within a year, and liabilities of NT$402.7m falling due after that. Offsetting these obligations, it had cash of NT$1.32b as well as receivables valued at NT$293.0m due within 12 months. So it actually has NT$788.5m more liquid assets than total liabilities.

This short term liquidity is a sign that Bioteque could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, Bioteque boasts net cash, so it's fair to say it does not have a heavy debt load!

While Bioteque doesn't seem to have gained much on the EBIT line, at least earnings remain stable for now. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Bioteque can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. While Bioteque has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. Over the most recent three years, Bioteque recorded free cash flow worth 79% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This cold hard cash means it can reduce its debt when it wants to.

Summing up

While it is always sensible to investigate a company's debt, in this case Bioteque has NT$1.25b in net cash and a decent-looking balance sheet. And it impressed us with free cash flow of NT$491m, being 79% of its EBIT. So we don't think Bioteque's use of debt is risky. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. For instance, we've identified 1 warning sign for Bioteque that you should be aware of.

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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