Here's Why Ttbio (GTSM:6493) Can Afford Some Debt

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.' 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. Importantly, Ttbio Corp. (GTSM:6493) does carry debt. But should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

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 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 Ttbio

What Is Ttbio's Debt?

The image below, which you can click on for greater detail, shows that Ttbio had debt of NT$54.8m at the end of December 2020, a reduction from NT$57.1m over a year. On the flip side, it has NT$42.1m in cash leading to net debt of about NT$12.6m.

A Look At Ttbio's Liabilities

The latest balance sheet data shows that Ttbio had liabilities of NT$78.9m due within a year, and liabilities of NT$45.5m falling due after that. Offsetting this, it had NT$42.1m in cash and NT$36.9m in receivables that were due within 12 months. So it has liabilities totalling NT$45.4m more than its cash and near-term receivables, combined.

Of course, Ttbio has a market capitalization of NT$622.9m, so these liabilities are probably manageable. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Ttbio 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.

In the last year Ttbio had a loss before interest and tax, and actually shrunk its revenue by 33%, to NT$179m. To be frank that doesn't bode well.

Caveat Emptor

While Ttbio's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. To be specific the EBIT loss came in at NT$14m. 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. However, it doesn't help that it burned through NT$21m 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. But ultimately, every company can contain risks that exist outside of the balance sheet. To that end, you should learn about the 3 warning signs we've spotted with Ttbio (including 1 which shouldn't be ignored) .

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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