DR.Chip Biotechnology Incorporation (GTSM:4131) Is Carrying A Fair Bit Of Debt

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says '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 DR.Chip Biotechnology Incorporation (GTSM:4131) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

When Is Debt A Problem?

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. If things get really bad, the lenders can take control of the business. 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. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for DR.Chip Biotechnology Incorporation

What Is DR.Chip Biotechnology Incorporation's Debt?

You can click the graphic below for the historical numbers, but it shows that as of September 2020 DR.Chip Biotechnology Incorporation had NT$60.0m of debt, an increase on NT$50.0m, over one year. However, it does have NT$47.1m in cash offsetting this, leading to net debt of about NT$12.9m.

A Look At DR.Chip Biotechnology Incorporation's Liabilities

Zooming in on the latest balance sheet data, we can see that DR.Chip Biotechnology Incorporation had liabilities of NT$146.0m due within 12 months and liabilities of NT$1.55m due beyond that. On the other hand, it had cash of NT$47.1m and NT$26.9m worth of receivables due within a year. So its liabilities total NT$73.5m more than the combination of its cash and short-term receivables.

While this might seem like a lot, it is not so bad since DR.Chip Biotechnology Incorporation has a market capitalization of NT$308.6m, and so it could probably strengthen its balance sheet by raising capital if it needed to. But it's clear that we should definitely closely examine whether it can manage its debt without dilution. The balance sheet is clearly the area to focus on when you are analysing debt. But it is DR.Chip Biotechnology Incorporation's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

In the last year DR.Chip Biotechnology Incorporation had a loss before interest and tax, and actually shrunk its revenue by 3.1%, to NT$96m. We would much prefer see growth.

Caveat Emptor

Importantly, DR.Chip Biotechnology Incorporation had an earnings before interest and tax (EBIT) loss over the last year. To be specific the EBIT loss came in at NT$29m. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. Another cause for caution is that is bled NT$21m in negative free cash flow over the last twelve months. So suffice it to say we consider the stock very 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. For example, we've discovered 3 warning signs for DR.Chip Biotechnology Incorporation that you should be aware of before investing here.

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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