Is All Cosmos Bio-Tech Holding (TPE:4148) Using Too Much Debt?

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. We can see that All Cosmos Bio-Tech Holding Corporation (TPE:4148) does use debt in its business. But is this debt a concern to shareholders?

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. If things get really bad, the lenders can take control of the business. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for All Cosmos Bio-Tech Holding

What Is All Cosmos Bio-Tech Holding's Debt?

You can click the graphic below for the historical numbers, but it shows that as of December 2020 All Cosmos Bio-Tech Holding had NT$51.7m of debt, an increase on NT$30.4m, over one year. However, its balance sheet shows it holds NT$850.9m in cash, so it actually has NT$799.2m net cash.

How Strong Is All Cosmos Bio-Tech Holding's Balance Sheet?

According to the last reported balance sheet, All Cosmos Bio-Tech Holding had liabilities of NT$221.4m due within 12 months, and liabilities of NT$29.8m due beyond 12 months. Offsetting this, it had NT$850.9m in cash and NT$574.1m in receivables that were due within 12 months. So it can boast NT$1.17b more liquid assets than total liabilities.

This excess liquidity is a great indication that All Cosmos Bio-Tech Holding's balance sheet is almost as strong as Fort Knox. Having regard to this fact, we think its balance sheet is as strong as an ox. Succinctly put, All Cosmos Bio-Tech Holding boasts net cash, so it's fair to say it does not have a heavy debt load!

In addition to that, we're happy to report that All Cosmos Bio-Tech Holding has boosted its EBIT by 41%, thus reducing the spectre of future debt repayments. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if All Cosmos Bio-Tech Holding can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. All Cosmos Bio-Tech Holding may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. Over the most recent three years, All Cosmos Bio-Tech Holding recorded free cash flow worth 76% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This cold hard cash means it can reduce its debt when it wants to.

Summing up

While we empathize with investors who find debt concerning, you should keep in mind that All Cosmos Bio-Tech Holding has net cash of NT$799.2m, as well as more liquid assets than liabilities. And it impressed us with its EBIT growth of 41% over the last year. The bottom line is that All Cosmos Bio-Tech Holding's use of debt is absolutely fine. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. Be aware that All Cosmos Bio-Tech Holding is showing 3 warning signs in our investment analysis , and 1 of those is concerning...

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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