Is Ezfly International Travel Agent (GTSM:2734) Using Too Much Debt?

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.' 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. We note that Ezfly International Travel Agent Co., Ltd. (GTSM:2734) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

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. If things get really bad, the lenders can take control of the business. 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.

See our latest analysis for Ezfly International Travel Agent

How Much Debt Does Ezfly International Travel Agent Carry?

You can click the graphic below for the historical numbers, but it shows that as of December 2020 Ezfly International Travel Agent had NT$180.5m of debt, an increase on NT$80.0m, over one year. On the flip side, it has NT$176.5m in cash leading to net debt of about NT$4.05m.

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

According to the last reported balance sheet, Ezfly International Travel Agent had liabilities of NT$106.5m due within 12 months, and liabilities of NT$168.7m due beyond 12 months. On the other hand, it had cash of NT$176.5m and NT$34.7m worth of receivables due within a year. So its liabilities total NT$64.0m more than the combination of its cash and short-term receivables.

Of course, Ezfly International Travel Agent has a market capitalization of NT$779.2m, so these liabilities are probably manageable. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. Carrying virtually no net debt, Ezfly International Travel Agent has a very light debt load indeed. The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since Ezfly International Travel Agent will need earnings to service that debt. 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$425m, which is a fall of 56%. To be frank that doesn't bode well.

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). Its EBIT loss was a whopping NT$105m. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. So we think its balance sheet is a little strained, though not beyond repair. However, it doesn't help that it burned through NT$76m 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. But ultimately, every company can contain risks that exist outside of the balance sheet. Case in point: We've spotted 3 warning signs for Ezfly International Travel Agent you should be aware of, and 1 of them can't be ignored.

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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