Singbao International (GTSM:6130) Has Debt But No Earnings; Should You Worry?

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.' 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 Singbao International Co. Ltd (GTSM:6130) makes use of debt. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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 step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for Singbao International

What Is Singbao International's Net Debt?

The image below, which you can click on for greater detail, shows that at September 2020 Singbao International had debt of NT$623.1m, up from NT$180.3m in one year. However, it also had NT$56.1m in cash, and so its net debt is NT$567.0m.

How Healthy Is Singbao International's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Singbao International had liabilities of NT$355.1m due within 12 months and liabilities of NT$308.6m due beyond that. Offsetting these obligations, it had cash of NT$56.1m as well as receivables valued at NT$13.9m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by NT$593.6m.

This deficit is considerable relative to its market capitalization of NT$649.0m, so it does suggest shareholders should keep an eye on Singbao International's use of debt. This suggests shareholders would be heavily diluted if the company needed to shore up its balance sheet in a hurry. There's no doubt that we learn most about debt from the balance sheet. But it is Singbao International'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 Singbao International wasn't profitable at an EBIT level, but managed to grow its revenue by 154%, to NT$126m. So there's no doubt that shareholders are cheering for growth

Caveat Emptor

Even though Singbao International managed to grow its top line quite deftly, the cold hard truth is that it is losing money on the EBIT line. Indeed, it lost NT$8.3m 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. So we think its balance sheet is a little strained, though not beyond repair. Another cause for caution is that is bled NT$151m in negative free cash flow over the last twelve months. So in short it's a really risky stock. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. For instance, we've identified 4 warning signs for Singbao International (2 can't be ignored) you should be aware of.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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