TaiMed Biologics (GTSM:4147) Has Debt But No Earnings; Should You Worry?

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.' 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 TaiMed Biologics Inc. (GTSM:4147) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

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. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. 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 thing to do when considering how much debt a business uses is to look at its cash and debt together.

View our latest analysis for TaiMed Biologics

What Is TaiMed Biologics's Debt?

As you can see below, at the end of September 2020, TaiMed Biologics had NT$536.0m of debt, up from none a year ago. Click the image for more detail. But on the other hand it also has NT$1.37b in cash, leading to a NT$837.8m net cash position.

How Healthy Is TaiMed Biologics's Balance Sheet?

We can see from the most recent balance sheet that TaiMed Biologics had liabilities of NT$375.6m falling due within a year, and liabilities of NT$1.33b due beyond that. On the other hand, it had cash of NT$1.37b and NT$232.2m worth of receivables due within a year. So it has liabilities totalling NT$102.0m more than its cash and near-term receivables, combined.

This state of affairs indicates that TaiMed Biologics'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$21.8b company is short on cash, but still worth keeping an eye on the balance sheet. Despite its noteworthy liabilities, TaiMed Biologics boasts net cash, so it's fair to say it does not have a heavy debt load! 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 TaiMed Biologics'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.

Over 12 months, TaiMed Biologics reported revenue of NT$779m, which is a gain of 27%, although it did not report any earnings before interest and tax. With any luck the company will be able to grow its way to profitability.

So How Risky Is TaiMed Biologics?

We have no doubt that loss making companies are, in general, riskier than profitable ones. And we do note that TaiMed Biologics had an earnings before interest and tax (EBIT) loss, over the last year. And over the same period it saw negative free cash outflow of NT$795m and booked a NT$173m accounting loss. However, it has net cash of NT$837.8m, so it has a bit of time before it will need more capital. TaiMed Biologics's revenue growth shone bright over the last year, so it may well be in a position to turn a profit in due course. By investing before those profits, shareholders take on more risk in the hope of bigger rewards. 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. Be aware that TaiMed Biologics is showing 1 warning sign in our investment analysis , you should know about...

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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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