Is Haiwan International Development (GTSM:3252) Using Too Much Debt?

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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, Haiwan International Development Co., Ltd (GTSM:3252) does carry debt. But should shareholders be worried about its use of debt?

When Is Debt Dangerous?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. 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 step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for Haiwan International Development

What Is Haiwan International Development's Net Debt?

As you can see below, at the end of September 2020, Haiwan International Development had NT$1.44b of debt, up from NT$1.21b a year ago. Click the image for more detail. However, it does have NT$50.3m in cash offsetting this, leading to net debt of about NT$1.39b.

How Strong Is Haiwan International Development's Balance Sheet?

We can see from the most recent balance sheet that Haiwan International Development had liabilities of NT$376.3m falling due within a year, and liabilities of NT$1.43b due beyond that. Offsetting this, it had NT$50.3m in cash and NT$19.1m in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by NT$1.73b.

This deficit casts a shadow over the NT$875.9m company, like a colossus towering over mere mortals. So we definitely think shareholders need to watch this one closely. After all, Haiwan International Development would likely require a major re-capitalisation if it had to pay its creditors today. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Haiwan International Development will need earnings to service that debt. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

In the last year Haiwan International Development had a loss before interest and tax, and actually shrunk its revenue by 72%, to NT$270m. That makes us nervous, to say the least.

Caveat Emptor

Not only did Haiwan International Development's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). Indeed, it lost NT$72m at the EBIT level. Considering that alongside the liabilities mentioned above make us nervous about the company. It would need to improve its operations quickly for us to be interested in it. Not least because it burned through NT$174m in negative free cash flow over the last year. So suffice it to say we consider the stock to be risky. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. To that end, you should learn about the 4 warning signs we've spotted with Haiwan International Development (including 2 which can't be ignored) .

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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