Does GeneFerm Biotechnology (GTSM:1796) Have A Healthy Balance Sheet?

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. We can see that GeneFerm Biotechnology Co., Ltd. (GTSM:1796) does use debt in its business. But is this debt a concern to shareholders?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. 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 GeneFerm Biotechnology

What Is GeneFerm Biotechnology's Debt?

The image below, which you can click on for greater detail, shows that GeneFerm Biotechnology had debt of NT$405.4m at the end of September 2020, a reduction from NT$449.0m over a year. However, it also had NT$359.8m in cash, and so its net debt is NT$45.6m.

How Strong Is GeneFerm Biotechnology's Balance Sheet?

We can see from the most recent balance sheet that GeneFerm Biotechnology had liabilities of NT$101.1m falling due within a year, and liabilities of NT$479.6m due beyond that. On the other hand, it had cash of NT$359.8m and NT$65.8m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by NT$155.0m.

Since publicly traded GeneFerm Biotechnology shares are worth a total of NT$803.3m, it seems unlikely that this level of liabilities would be a major threat. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. 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 GeneFerm Biotechnology 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 GeneFerm Biotechnology wasn't profitable at an EBIT level, but managed to grow its revenue by 6.0%, to NT$360m. That rate of growth is a bit slow for our taste, but it takes all types to make a world.

Caveat Emptor

Over the last twelve months GeneFerm Biotechnology produced an earnings before interest and tax (EBIT) loss. Indeed, it lost NT$2.9m at the EBIT level. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much 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$23m 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. Take risks, for example - GeneFerm Biotechnology has 4 warning signs (and 2 which can't be ignored) we think you should know about.

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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This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.
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