Bioptik Technology Incorporation (GTSM:4161) Is Making Moderate Use Of Debt

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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 Bioptik Technology Incorporation (GTSM:4161) makes use of debt. But the more important question is: how much risk is that debt creating?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. 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 Bioptik Technology Incorporation

How Much Debt Does Bioptik Technology Incorporation Carry?

The chart below, which you can click on for greater detail, shows that Bioptik Technology Incorporation had NT$603.2m in debt in September 2020; about the same as the year before. However, it also had NT$407.5m in cash, and so its net debt is NT$195.6m.

A Look At Bioptik Technology Incorporation's Liabilities

Zooming in on the latest balance sheet data, we can see that Bioptik Technology Incorporation had liabilities of NT$448.8m due within 12 months and liabilities of NT$268.3m due beyond that. Offsetting this, it had NT$407.5m in cash and NT$137.0m in receivables that were due within 12 months. So it has liabilities totalling NT$172.7m more than its cash and near-term receivables, combined.

Of course, Bioptik Technology Incorporation has a market capitalization of NT$1.21b, so these liabilities are probably manageable. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. When analysing debt levels, the balance sheet is the obvious place to start. But it is Bioptik Technology Incorporation's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Over 12 months, Bioptik Technology Incorporation made a loss at the EBIT level, and saw its revenue drop to NT$513m, which is a fall of 7.6%. That's not what we would hope to see.

Caveat Emptor

Over the last twelve months Bioptik Technology Incorporation produced an earnings before interest and tax (EBIT) loss. To be specific the EBIT loss came in at NT$42m. 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. However, it doesn't help that it burned through NT$36m of cash over the last year. So suffice it to say we do 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. We've identified 4 warning signs with Bioptik Technology Incorporation (at least 2 which are potentially serious) , and understanding them should be part of your investment process.

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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