Is EirGenix (GTSM:6589) Using Debt Sensibly?

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.' 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. Importantly, EirGenix Inc. (GTSM:6589) does carry debt. But the more important question is: how much risk is that debt creating?

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, debt can be an important tool in businesses, particularly capital heavy businesses. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for EirGenix

What Is EirGenix's Debt?

The image below, which you can click on for greater detail, shows that at September 2020 EirGenix had debt of NT$1.01b, up from NT$786.5m in one year. However, it does have NT$1.05b in cash offsetting this, leading to net cash of NT$45.7m.

How Healthy Is EirGenix's Balance Sheet?

The latest balance sheet data shows that EirGenix had liabilities of NT$693.5m due within a year, and liabilities of NT$1.29b falling due after that. Offsetting these obligations, it had cash of NT$1.05b as well as receivables valued at NT$522.6m due within 12 months. So its liabilities total NT$406.4m more than the combination of its cash and short-term receivables.

Of course, EirGenix has a market capitalization of NT$13.3b, so these liabilities are probably manageable. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. While it does have liabilities worth noting, EirGenix also has more cash than debt, so we're pretty confident it can manage its debt safely. The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine EirGenix'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.

In the last year EirGenix wasn't profitable at an EBIT level, but managed to grow its revenue by 150%, to NT$991m. So there's no doubt that shareholders are cheering for growth

So How Risky Is EirGenix?

We have no doubt that loss making companies are, in general, riskier than profitable ones. And in the last year EirGenix had an earnings before interest and tax (EBIT) loss, truth be told. Indeed, in that time it burnt through NT$714m of cash and made a loss of NT$1.0b. With only NT$45.7m on the balance sheet, it would appear that its going to need to raise capital again soon. Importantly, EirGenix's revenue growth is hot to trot. High growth pre-profit companies may well be risky, but they can also offer great 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. These risks can be hard to spot. Every company has them, and we've spotted 4 warning signs for EirGenix (of which 1 doesn't sit too well with us!) 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.

When trading EirGenix or any other investment, use the platform considered by many to be the Professional's Gateway to the Worlds Market, Interactive Brokers. You get the lowest-cost* trading on stocks, options, futures, forex, bonds and funds worldwide from a single integrated account. Promoted

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.
^*Interactive Brokers Rated Lowest Cost Broker by StockBrokers.com Annual Online Review 2020

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.