Would Medigen Vaccine Biologics (GTSM:6547) Be Better Off With Less Debt?

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. We can see that Medigen Vaccine Biologics Corporation (GTSM:6547) does use debt in its business. But should shareholders be worried about its use of debt?

When Is Debt Dangerous?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for Medigen Vaccine Biologics

What Is Medigen Vaccine Biologics's Debt?

The image below, which you can click on for greater detail, shows that Medigen Vaccine Biologics had debt of NT$406.6m at the end of September 2020, a reduction from NT$453.6m over a year. On the flip side, it has NT$349.2m in cash leading to net debt of about NT$57.3m.

How Healthy Is Medigen Vaccine Biologics's Balance Sheet?

The latest balance sheet data shows that Medigen Vaccine Biologics had liabilities of NT$183.8m due within a year, and liabilities of NT$636.3m falling due after that. Offsetting these obligations, it had cash of NT$349.2m as well as receivables valued at NT$1.91m due within 12 months. So its liabilities total NT$468.9m more than the combination of its cash and short-term receivables.

Given Medigen Vaccine Biologics has a market capitalization of NT$19.8b, 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. But either way, Medigen Vaccine Biologics has virtually no net debt, 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 Medigen Vaccine Biologics'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.

Over 12 months, Medigen Vaccine Biologics reported revenue of NT$5.1m, which is a gain of 684%, although it did not report any earnings before interest and tax. When it comes to revenue growth, that's like nailing the game winning 3-pointer!

Caveat Emptor

Over the last twelve months Medigen Vaccine Biologics produced an earnings before interest and tax (EBIT) loss. Indeed, it lost NT$691m 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. Another cause for caution is that is bled NT$672m in negative free cash flow over the last twelve months. So to be blunt we think it is 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. For example, we've discovered 4 warning signs for Medigen Vaccine Biologics (3 are a bit concerning!) that you should be aware of before investing here.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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