Is Tekcore (GTSM:3339) Using Too Much Debt?

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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 Tekcore Co., Ltd (GTSM:3339) makes use of debt. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. 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. When we examine debt levels, we first consider both cash and debt levels, together.

View 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$488.0m of debt in December 2020, down from NT$512.0m, one year before. However, it does have NT$36.9m in cash offsetting this, leading to net debt of about NT$451.1m.

How Healthy Is Tekcore's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Tekcore had liabilities of NT$228.2m due within 12 months and liabilities of NT$465.5m due beyond that. On the other hand, it had cash of NT$36.9m and NT$304.4m worth of receivables due within a year. So it has liabilities totalling NT$352.5m more than its cash and near-term receivables, combined.

Given this deficit is actually higher than the company's market capitalization of NT$346.7m, we think shareholders really should watch Tekcore's debt levels, like a parent watching their child ride a bike for the first time. In the scenario where the company had to clean up its balance sheet quickly, it seems likely shareholders would suffer extensive dilution. 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 Tekcore will need earnings to service that debt. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

In the last year Tekcore wasn't profitable at an EBIT level, but managed to grow its revenue by 15%, to NT$637m. That rate of growth is a bit slow for our taste, but it takes all types to make a world.

Caveat Emptor

Importantly, Tekcore had an earnings before interest and tax (EBIT) loss over the last year. Indeed, it lost a very considerable NT$52m at the EBIT level. 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 burned through NT$44m in negative free cash flow over the last year. That means it's on the risky side of things. 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 3 warning signs for Tekcore (1 is potentially serious!) that you should be aware of before investing here.

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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