Health Check: How Prudently Does Tekcore (GTSM:3339) Use Debt?

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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. As with many other companies Tekcore Co., Ltd (GTSM:3339) makes use of debt. But the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for Tekcore

How Much Debt Does Tekcore Carry?

You can click the graphic below for the historical numbers, but it shows that Tekcore had NT$494.0m of debt in September 2020, down from NT$518.0m, one year before. However, it also had NT$42.0m in cash, and so its net debt is NT$452.0m.

How Healthy Is Tekcore's Balance Sheet?

The latest balance sheet data shows that Tekcore had liabilities of NT$246.4m due within a year, and liabilities of NT$471.2m falling due after that. Offsetting these obligations, it had cash of NT$42.0m as well as receivables valued at NT$297.5m due within 12 months. So it has liabilities totalling NT$378.2m more than its cash and near-term receivables, combined.

When you consider that this deficiency exceeds the company's NT$258.1m market capitalization, you might well be inclined to review the balance sheet intently. Hypothetically, extremely heavy dilution would be required if the company were forced to pay down its liabilities by raising capital at the current share price. There's no doubt that we learn most about debt from the balance sheet. But it is Tekcore'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, Tekcore reported revenue of NT$596m, which is a gain of 3.3%, although it did not report any earnings before interest and tax. That rate of growth is a bit slow for our taste, but it takes all types to make a world.

Caveat Emptor

Over the last twelve months Tekcore produced an earnings before interest and tax (EBIT) loss. Its EBIT loss was a whopping NT$93m. When we look at that alongside the significant liabilities, we're not particularly confident about the company. It would need to improve its operations quickly for us to be interested in it. Not least because it had negative free cash flow of NT$51m over the last twelve months. So suffice it to say we 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. Case in point: We've spotted 3 warning signs for Tekcore you should be aware of, and 2 of them can't be ignored.

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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