Is Savior Lifetec (GTSM:4167) Using Too Much 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. As with many other companies Savior Lifetec Corporation (GTSM:4167) makes use of debt. But the more important question is: how much risk is that debt creating?

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. 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, 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 step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for Savior Lifetec

How Much Debt Does Savior Lifetec Carry?

As you can see below, Savior Lifetec had NT$520.9m of debt at December 2020, down from NT$1.02b a year prior. However, its balance sheet shows it holds NT$802.2m in cash, so it actually has NT$281.4m net cash.

A Look At Savior Lifetec's Liabilities

We can see from the most recent balance sheet that Savior Lifetec had liabilities of NT$570.8m falling due within a year, and liabilities of NT$935.6m due beyond that. Offsetting this, it had NT$802.2m in cash and NT$571.1m in receivables that were due within 12 months. So its liabilities total NT$133.1m more than the combination of its cash and short-term receivables.

This state of affairs indicates that Savior Lifetec's balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So while it's hard to imagine that the NT$9.04b company is struggling for cash, we still think it's worth monitoring its balance sheet. Despite its noteworthy liabilities, Savior Lifetec boasts net cash, so it's fair to say it does not have a heavy debt load!

Even more impressive was the fact that Savior Lifetec grew its EBIT by 336% over twelve months. If maintained that growth will make the debt even more manageable in the years ahead. 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 Savior Lifetec's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. While Savior Lifetec has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. Over the last two years, Savior Lifetec saw substantial negative free cash flow, in total. While investors are no doubt expecting a reversal of that situation in due course, it clearly does mean its use of debt is more risky.

Summing up

We could understand if investors are concerned about Savior Lifetec's liabilities, but we can be reassured by the fact it has has net cash of NT$281.4m. And it impressed us with its EBIT growth of 336% over the last year. So we don't have any problem with Savior Lifetec's use of debt. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. These risks can be hard to spot. Every company has them, and we've spotted 1 warning sign for Savior Lifetec you should know about.

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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