Is BioLASCO Taiwan (GTSM:6662) A Risky Investment?

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' 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. As with many other companies BioLASCO Taiwan Co., Ltd. (GTSM:6662) makes use of debt. But the more important question is: how much risk is that debt creating?

When Is Debt Dangerous?

Debt assists a business until the business has trouble paying it off, either with new capital or with free 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. 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. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

Check out our latest analysis for BioLASCO Taiwan

What Is BioLASCO Taiwan's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of September 2020 BioLASCO Taiwan had NT$73.6m of debt, an increase on NT$9.58m, over one year. However, its balance sheet shows it holds NT$222.3m in cash, so it actually has NT$148.7m net cash.

A Look At BioLASCO Taiwan's Liabilities

The latest balance sheet data shows that BioLASCO Taiwan had liabilities of NT$47.0m due within a year, and liabilities of NT$70.8m falling due after that. On the other hand, it had cash of NT$222.3m and NT$35.1m worth of receivables due within a year. So it actually has NT$139.6m more liquid assets than total liabilities.

This excess liquidity suggests that BioLASCO Taiwan is taking a careful approach to debt. Due to its strong net asset position, it is not likely to face issues with its lenders. Simply put, the fact that BioLASCO Taiwan has more cash than debt is arguably a good indication that it can manage its debt safely.

But the other side of the story is that BioLASCO Taiwan saw its EBIT decline by 2.8% over the last year. That sort of decline, if sustained, will obviously make debt harder to handle. The balance sheet is clearly the area to focus on when you are analysing debt. But it is BioLASCO Taiwan'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.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. While BioLASCO Taiwan 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. During the last three years, BioLASCO Taiwan produced sturdy free cash flow equating to 60% of its EBIT, about what we'd expect. This free cash flow puts the company in a good position to pay down debt, when appropriate.

Summing up

While it is always sensible to investigate a company's debt, in this case BioLASCO Taiwan has NT$148.7m in net cash and a decent-looking balance sheet. So we don't think BioLASCO Taiwan's use of debt 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. Case in point: We've spotted 2 warning signs for BioLASCO Taiwan you should be aware of.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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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