TTY Biopharm (GTSM:4105) Has A Pretty Healthy Balance Sheet

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 seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. We can see that TTY Biopharm Company Limited (GTSM:4105) does use debt in its business. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for TTY Biopharm

What Is TTY Biopharm's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of September 2020 TTY Biopharm had NT$2.50b of debt, an increase on NT$2.10b, over one year. However, it does have NT$2.67b in cash offsetting this, leading to net cash of NT$173.0m.

How Healthy Is TTY Biopharm's Balance Sheet?

We can see from the most recent balance sheet that TTY Biopharm had liabilities of NT$2.76b falling due within a year, and liabilities of NT$754.9m due beyond that. On the other hand, it had cash of NT$2.67b and NT$847.7m worth of receivables due within a year. So its total liabilities are just about perfectly matched by its shorter-term, liquid assets.

This state of affairs indicates that TTY Biopharm's balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So it's very unlikely that the NT$17.0b company is short on cash, but still worth keeping an eye on the balance sheet. Simply put, the fact that TTY Biopharm has more cash than debt is arguably a good indication that it can manage its debt safely.

In fact TTY Biopharm's saving grace is its low debt levels, because its EBIT has tanked 26% in the last twelve months. When it comes to paying off debt, falling earnings are no more useful than sugary sodas are for your health. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine TTY Biopharm's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. TTY Biopharm 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. During the last three years, TTY Biopharm produced sturdy free cash flow equating to 78% of its EBIT, about what we'd expect. This free cash flow puts the company in a good position to pay down debt, when appropriate.

Summing up

While it is always sensible to investigate a company's debt, in this case TTY Biopharm has NT$173.0m in net cash and a decent-looking balance sheet. And it impressed us with free cash flow of NT$455m, being 78% of its EBIT. So we are not troubled with TTY Biopharm's debt use. 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. For example, we've discovered 3 warning signs for TTY Biopharm that you should be aware of before investing here.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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