TrueLight (GTSM:3234) Is Making Moderate Use Of Debt

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. Importantly, TrueLight Corporation (GTSM:3234) does carry debt. But is this debt a concern to shareholders?

When Is Debt Dangerous?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. 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 thing to do when considering how much debt a business uses is to look at its cash and debt together.

View our latest analysis for TrueLight

How Much Debt Does TrueLight Carry?

As you can see below, TrueLight had NT$812.1m of debt at September 2020, down from NT$1.14b a year prior. However, it also had NT$180.7m in cash, and so its net debt is NT$631.5m.

A Look At TrueLight's Liabilities

The latest balance sheet data shows that TrueLight had liabilities of NT$1.04b due within a year, and liabilities of NT$213.8m falling due after that. Offsetting these obligations, it had cash of NT$180.7m as well as receivables valued at NT$271.6m due within 12 months. So it has liabilities totalling NT$800.8m more than its cash and near-term receivables, combined.

This deficit isn't so bad because TrueLight is worth NT$3.11b, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. But it's clear that we should definitely closely examine whether it can manage its debt without dilution. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine TrueLight's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Over 12 months, TrueLight made a loss at the EBIT level, and saw its revenue drop to NT$1.5b, which is a fall of 2.6%. That's not what we would hope to see.

Caveat Emptor

Importantly, TrueLight had an earnings before interest and tax (EBIT) loss over the last year. To be specific the EBIT loss came in at NT$65m. 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. For example, we would not want to see a repeat of last year's loss of NT$98m. So in short it's a really risky stock. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. To that end, you should be aware of the 1 warning sign we've spotted with TrueLight .

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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