David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the 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 note that DR.Chip Biotechnology Incorporation (GTSM:4131) does have debt on its balance sheet. 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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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, debt can be an important tool in businesses, particularly capital heavy businesses. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.
How Much Debt Does DR.Chip Biotechnology Incorporation Carry?
You can click the graphic below for the historical numbers, but it shows that as of December 2020 DR.Chip Biotechnology Incorporation had NT$60.0m of debt, an increase on NT$50.0m, over one year. However, it also had NT$54.5m in cash, and so its net debt is NT$5.53m.
A Look At DR.Chip Biotechnology Incorporation's Liabilities
The latest balance sheet data shows that DR.Chip Biotechnology Incorporation had liabilities of NT$142.9m due within a year, and liabilities of NT$1.50m falling due after that. Offsetting this, it had NT$54.5m in cash and NT$28.9m in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by NT$61.0m.
Given DR.Chip Biotechnology Incorporation has a market capitalization of NT$362.2m, it's hard to believe these liabilities pose much threat. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. There's no doubt that we learn most about debt from the balance sheet. But it is DR.Chip Biotechnology Incorporation's earnings that will influence how the balance sheet holds up in the future. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.
In the last year DR.Chip Biotechnology Incorporation had a loss before interest and tax, and actually shrunk its revenue by 11%, to NT$93m. We would much prefer see growth.
Not only did DR.Chip Biotechnology Incorporation's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). Indeed, it lost NT$33m at the EBIT level. 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. However, it doesn't help that it burned through NT$28m of cash over the last year. So in short it's a really risky stock. 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. To that end, you should learn about the 4 warning signs we've spotted with DR.Chip Biotechnology Incorporation (including 1 which is potentially serious) .
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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