Does Singbao International (GTSM:6130) Have A Healthy Balance Sheet?

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' 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 Singbao International Co. Ltd (GTSM:6130) makes use of debt. But the real question is whether this debt is making the company risky.

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. 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 Singbao International

How Much Debt Does Singbao International Carry?

You can click the graphic below for the historical numbers, but it shows that as of September 2020 Singbao International had NT$586.2m of debt, an increase on NT$180.3m, over one year. However, because it has a cash reserve of NT$67.7m, its net debt is less, at about NT$518.6m.

How Healthy Is Singbao International's Balance Sheet?

The latest balance sheet data shows that Singbao International had liabilities of NT$355.1m due within a year, and liabilities of NT$308.6m falling due after that. Offsetting this, it had NT$67.7m in cash and NT$13.9m in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by NT$582.1m.

This is a mountain of leverage relative to its market capitalization of NT$708.0m. This suggests shareholders would be heavily diluted if the company needed to shore up its balance sheet in a hurry. The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since Singbao International will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Over 12 months, Singbao International reported revenue of NT$126m, which is a gain of 154%, although it did not report any earnings before interest and tax. So its pretty obvious shareholders are hoping for more growth!

Caveat Emptor

Despite the top line growth, Singbao International still had an earnings before interest and tax (EBIT) loss over the last year. Indeed, it lost NT$4.0m at the EBIT level. 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$151m in negative free cash flow over the last twelve months. So suffice it to say we consider the stock very 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. To that end, you should learn about the 5 warning signs we've spotted with Singbao International (including 2 which is don't sit too well with us) .

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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