Ezfly International Travel Agent (GTSM:2734) Is Carrying A Fair Bit Of Debt

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.' 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 Ezfly International Travel Agent Co., Ltd. (GTSM:2734) makes use of debt. But the real question is whether this debt is making the company risky.

What Risk Does Debt Bring?

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. 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. 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. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for Ezfly International Travel Agent

What Is Ezfly International Travel Agent's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of September 2020 Ezfly International Travel Agent had NT$140.0m of debt, an increase on NT$88.0m, over one year. However, it also had NT$110.6m in cash, and so its net debt is NT$29.4m.

How Strong Is Ezfly International Travel Agent's Balance Sheet?

We can see from the most recent balance sheet that Ezfly International Travel Agent had liabilities of NT$131.8m falling due within a year, and liabilities of NT$150.9m due beyond that. Offsetting this, it had NT$110.6m in cash and NT$40.6m in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by NT$131.6m.

This deficit isn't so bad because Ezfly International Travel Agent is worth NT$366.1m, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. However, it is still worthwhile taking a close look at its ability to pay off debt. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Ezfly International Travel Agent'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.

Over 12 months, Ezfly International Travel Agent made a loss at the EBIT level, and saw its revenue drop to NT$568m, which is a fall of 40%. That makes us nervous, to say the least.

Caveat Emptor

Not only did Ezfly International Travel Agent's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). Indeed, it lost a very considerable NT$95m at the EBIT level. 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. However, it doesn't help that it burned through NT$79m of cash over the last year. So suffice it to say we consider the stock very risky. 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. Like risks, for instance. Every company has them, and we've spotted 3 warning signs for Ezfly International Travel Agent (of which 2 can't be ignored!) you should know about.

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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