David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the 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 Taiwan Oasis Technology Co., Ltd. (GTSM:3066) makes use of debt. But is this debt a concern to shareholders?
When Is Debt A Problem?
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. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.
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$432.6m in debt in December 2020; about the same as the year before. On the flip side, it has NT$193.8m in cash leading to net debt of about NT$238.8m.
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$423.8m falling due within a year, and liabilities of NT$181.0m due beyond that. On the other hand, it had cash of NT$193.8m and NT$123.5m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by NT$287.5m.
This deficit isn't so bad because Taiwan Oasis Technology is worth NT$1.30b, 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. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Taiwan Oasis Technology 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.
In the last year Taiwan Oasis Technology had a loss before interest and tax, and actually shrunk its revenue by 20%, to NT$336m. We would much prefer see growth.
While Taiwan Oasis Technology's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. To be specific the EBIT loss came in at NT$35m. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any 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$966k of cash over the last year. So suffice it to say we do consider the stock to be 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. For example, we've discovered 4 warning signs for Taiwan Oasis Technology (1 is potentially serious!) that you should be aware of before investing here.
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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