Taiwan Oasis Technology (GTSM:3066) Is Making Moderate Use 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.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. We can see that Taiwan Oasis Technology Co., Ltd. (GTSM:3066) does use debt in its business. But should shareholders be worried about its use of debt?

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. If things get really bad, the lenders can take control of the business. 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. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for Taiwan Oasis Technology

How Much Debt Does Taiwan Oasis Technology Carry?

The chart below, which you can click on for greater detail, shows that Taiwan Oasis Technology had NT$440.7m in debt in September 2020; about the same as the year before. However, it also had NT$184.5m in cash, and so its net debt is NT$256.2m.

How Healthy Is Taiwan Oasis Technology's Balance Sheet?

We can see from the most recent balance sheet that Taiwan Oasis Technology had liabilities of NT$450.3m falling due within a year, and liabilities of NT$143.2m due beyond that. On the other hand, it had cash of NT$184.5m and NT$101.8m worth of receivables due within a year. So its liabilities total NT$307.2m more than the combination of its cash and short-term receivables.

Taiwan Oasis Technology has a market capitalization of NT$597.3m, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. There's no doubt that we learn most about debt from the balance sheet. But it is Taiwan Oasis Technology'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 Taiwan Oasis Technology had a loss before interest and tax, and actually shrunk its revenue by 15%, to NT$346m. That's not what we would hope to see.

Caveat Emptor

Not only did Taiwan Oasis Technology's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). To be specific the EBIT loss came in at NT$36m. 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. Surprisingly, we note that it actually reported positive free cash flow of NT$30m and a profit of NT$11m. So one might argue that there's still a chance it can get things on the right track. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. For example, we've discovered 3 warning signs for Taiwan Oasis Technology (1 is concerning!) that you should be aware of before investing here.

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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