Is Tien Liang BioTech (GTSM:4127) Using Too Much Debt?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. Importantly, Tien Liang BioTech Co., Ltd. (GTSM:4127) does carry debt. But should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for Tien Liang BioTech

What Is Tien Liang BioTech's Debt?

You can click the graphic below for the historical numbers, but it shows that as of December 2020 Tien Liang BioTech had NT$170.5m of debt, an increase on NT$131.4m, over one year. On the flip side, it has NT$115.2m in cash leading to net debt of about NT$55.3m.

How Healthy Is Tien Liang BioTech's Balance Sheet?

The latest balance sheet data shows that Tien Liang BioTech had liabilities of NT$240.9m due within a year, and liabilities of NT$16.8m falling due after that. Offsetting these obligations, it had cash of NT$115.2m as well as receivables valued at NT$67.4m due within 12 months. So its liabilities total NT$75.0m more than the combination of its cash and short-term receivables.

Since publicly traded Tien Liang BioTech shares are worth a total of NT$471.3m, it seems unlikely that this level of liabilities would be a major threat. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. 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 Tien Liang BioTech 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.

Over 12 months, Tien Liang BioTech saw its revenue hold pretty steady, and it did not report positive earnings before interest and tax. While that hardly impresses, its not too bad either.

Caveat Emptor

Over the last twelve months Tien Liang BioTech produced an earnings before interest and tax (EBIT) loss. Its EBIT loss was a whopping NT$51m. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. However, it doesn't help that it burned through NT$12m of cash over the last year. So suffice it to say we do consider the stock to be risky. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. We've identified 2 warning signs with Tien Liang BioTech (at least 1 which is concerning) , and understanding them should be part of your investment process.

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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