Does Radium Life Technology (TPE:2547) Have A Healthy Balance Sheet?

Warren Buffett famously said, '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 Radium Life Technology Co., Ltd. (TPE:2547) makes use of debt. But is this debt a concern to shareholders?

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 usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. 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. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for Radium Life Technology

How Much Debt Does Radium Life Technology Carry?

You can click the graphic below for the historical numbers, but it shows that as of September 2020 Radium Life Technology had NT$35.9b of debt, an increase on NT$32.9b, over one year. However, it also had NT$3.55b in cash, and so its net debt is NT$32.4b.

How Strong Is Radium Life Technology's Balance Sheet?

We can see from the most recent balance sheet that Radium Life Technology had liabilities of NT$14.6b falling due within a year, and liabilities of NT$30.3b due beyond that. On the other hand, it had cash of NT$3.55b and NT$642.2m worth of receivables due within a year. So it has liabilities totalling NT$40.7b more than its cash and near-term receivables, combined.

This deficit casts a shadow over the NT$10.6b company, like a colossus towering over mere mortals. So we definitely think shareholders need to watch this one closely. After all, Radium Life Technology would likely require a major re-capitalisation if it had to pay its creditors today.

We measure a company's debt load relative to its earnings power by looking at its net debt divided by its earnings before interest, tax, depreciation, and amortization (EBITDA) and by calculating how easily its earnings before interest and tax (EBIT) cover its interest expense (interest cover). Thus we consider debt relative to earnings both with and without depreciation and amortization expenses.

Weak interest cover of 0.75 times and a disturbingly high net debt to EBITDA ratio of 25.5 hit our confidence in Radium Life Technology like a one-two punch to the gut. This means we'd consider it to have a heavy debt load. Worse, Radium Life Technology's EBIT was down 71% over the last year. If earnings keep going like that over the long term, it has a snowball's chance in hell of paying off that debt. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Radium Life Technology's earnings that will influence how the balance sheet holds up in the future. 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.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. So it's worth checking how much of that EBIT is backed by free cash flow. Happily for any shareholders, Radium Life Technology actually produced more free cash flow than EBIT over the last three years. That sort of strong cash generation warms our hearts like a puppy in a bumblebee suit.

Our View

On the face of it, Radium Life Technology's EBIT growth rate left us tentative about the stock, and its level of total liabilities was no more enticing than the one empty restaurant on the busiest night of the year. But at least it's pretty decent at converting EBIT to free cash flow; that's encouraging. Taking into account all the aforementioned factors, it looks like Radium Life Technology has too much debt. That sort of riskiness is ok for some, but it certainly doesn't float our boat. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. Take risks, for example - Radium Life Technology has 2 warning signs (and 1 which is concerning) we think you should know about.

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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