Is Better Life Group (TPE:1805) 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.' 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. We note that Better Life Group Co., LTD. (TPE:1805) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for Better Life Group

How Much Debt Does Better Life Group Carry?

You can click the graphic below for the historical numbers, but it shows that Better Life Group had NT$633.7m of debt in December 2020, down from NT$713.7m, one year before. On the flip side, it has NT$35.8m in cash leading to net debt of about NT$597.9m.

How Healthy Is Better Life Group's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Better Life Group had liabilities of NT$742.1m due within 12 months and liabilities of NT$30.8m due beyond that. On the other hand, it had cash of NT$35.8m and NT$26.8m worth of receivables due within a year. So it has liabilities totalling NT$710.3m more than its cash and near-term receivables, combined.

This deficit isn't so bad because Better Life Group is worth NT$1.59b, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. But it's clear that we should definitely closely examine whether it can manage its debt without dilution. There's no doubt that we learn most about debt from the balance sheet. But it is Better Life Group'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 Better Life Group wasn't profitable at an EBIT level, but managed to grow its revenue by 72%, to NT$220m. With any luck the company will be able to grow its way to profitability.

Caveat Emptor

While we can certainly appreciate Better Life Group's revenue growth, its earnings before interest and tax (EBIT) loss is not ideal. To be specific the EBIT loss came in at NT$53m. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much 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$40m 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. These risks can be hard to spot. Every company has them, and we've spotted 4 warning signs for Better Life Group (of which 2 are significant!) you should know about.

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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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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