Intech Biopharm (GTSM:6461) Is Making Moderate Use Of Debt

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.' 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 Intech Biopharm Corporation (GTSM:6461) makes use of debt. But the real question is whether this debt is making the company risky.

What Risk Does Debt Bring?

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 usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for Intech Biopharm

What Is Intech Biopharm's Net Debt?

As you can see below, Intech Biopharm had NT$937.7m of debt at September 2020, down from NT$1.09b a year prior. However, it also had NT$103.1m in cash, and so its net debt is NT$834.7m.

A Look At Intech Biopharm's Liabilities

Zooming in on the latest balance sheet data, we can see that Intech Biopharm had liabilities of NT$140.4m due within 12 months and liabilities of NT$900.4m due beyond that. Offsetting this, it had NT$103.1m in cash and NT$11.1m in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by NT$926.7m.

While this might seem like a lot, it is not so bad since Intech Biopharm has a market capitalization of NT$2.15b, and so it could probably strengthen its balance sheet by raising capital if it needed to. However, it is still worthwhile taking a close look at its ability to pay off debt. When analysing debt levels, the balance sheet is the obvious place to start. But it is Intech Biopharm'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 Intech Biopharm wasn't profitable at an EBIT level, but managed to grow its revenue by 7.9%, to NT$19m. We usually like to see faster growth from unprofitable companies, but each to their own.

Caveat Emptor

Importantly, Intech Biopharm had an earnings before interest and tax (EBIT) loss over the last year. Its EBIT loss was a whopping NT$258m. 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. So we think its balance sheet is a little strained, though not beyond repair. Another cause for caution is that is bled NT$229m 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. But ultimately, every company can contain risks that exist outside of the balance sheet. Consider for instance, the ever-present spectre of investment risk. We've identified 5 warning signs with Intech Biopharm (at least 3 which are concerning) , and understanding them should be part of your investment process.

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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