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.' 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. As with many other companies Visgeneer Inc. (GTSM:4197) makes use of debt. But the real question is whether this debt is making the company risky.
What Risk Does Debt Bring?
Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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.
What Is Visgeneer's Net Debt?
As you can see below, Visgeneer had NT$210.0m of debt at December 2020, down from NT$230.0m a year prior. However, because it has a cash reserve of NT$74.4m, its net debt is less, at about NT$135.6m.
How Strong Is Visgeneer's Balance Sheet?
We can see from the most recent balance sheet that Visgeneer had liabilities of NT$72.5m falling due within a year, and liabilities of NT$171.5m due beyond that. On the other hand, it had cash of NT$74.4m and NT$98.0m worth of receivables due within a year. So its liabilities total NT$71.5m more than the combination of its cash and short-term receivables.
Of course, Visgeneer has a market capitalization of NT$434.2m, 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. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Visgeneer'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.
In the last year Visgeneer wasn't profitable at an EBIT level, but managed to grow its revenue by 16%, to NT$176m. That rate of growth is a bit slow for our taste, but it takes all types to make a world.
Over the last twelve months Visgeneer produced an earnings before interest and tax (EBIT) loss. To be specific the EBIT loss came in at NT$939k. 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$15m in negative free cash flow over the last twelve months. So suffice it to say we do consider the stock to be 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. These risks can be hard to spot. Every company has them, and we've spotted 2 warning signs for Visgeneer (of which 1 is a bit concerning!) you should know about.
If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.
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