Tien Liang BioTech (GTSM:4127) Is Carrying A Fair Bit Of 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.' 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 note that Tien Liang BioTech Co., Ltd. (GTSM:4127) does have debt on its balance sheet. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

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. 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, 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.

View our latest analysis for Tien Liang BioTech

What Is Tien Liang BioTech's Debt?

The image below, which you can click on for greater detail, shows that Tien Liang BioTech had debt of NT$120.5m at the end of September 2020, a reduction from NT$134.6m over a year. On the flip side, it has NT$58.4m in cash leading to net debt of about NT$62.1m.

How Healthy Is Tien Liang BioTech's Balance Sheet?

According to the last reported balance sheet, Tien Liang BioTech had liabilities of NT$183.8m due within 12 months, and liabilities of NT$16.2m due beyond 12 months. Offsetting these obligations, it had cash of NT$58.4m as well as receivables valued at NT$81.8m due within 12 months. So its liabilities total NT$59.8m more than the combination of its cash and short-term receivables.

Given Tien Liang BioTech has a market capitalization of NT$512.5m, it's hard to believe these liabilities pose much 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.

In the last year Tien Liang BioTech's revenue was pretty flat, and it made a negative EBIT. While that hardly impresses, its not too bad either.

Caveat Emptor

Importantly, Tien Liang BioTech had an earnings before interest and tax (EBIT) loss over the last year. Indeed, it lost NT$24m 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$42m of cash over the last year. So in short it's a really risky stock. 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. Consider for instance, the ever-present spectre of investment risk. We've identified 3 warning signs with Tien Liang BioTech (at least 2 which make us uncomfortable) , and understanding them should be part of your investment process.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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