Is Motech Industries (GTSM:6244) Using Too Much 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.' 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. We note that Motech Industries Inc. (GTSM:6244) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

Debt assists a business until the business has trouble paying it off, either with new capital or with free 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, 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.

See our latest analysis for Motech Industries

How Much Debt Does Motech Industries Carry?

You can click the graphic below for the historical numbers, but it shows that Motech Industries had NT$3.16b of debt in September 2020, down from NT$3.83b, one year before. On the flip side, it has NT$2.76b in cash leading to net debt of about NT$400.3m.

A Look At Motech Industries' Liabilities

The latest balance sheet data shows that Motech Industries had liabilities of NT$3.49b due within a year, and liabilities of NT$1.14b falling due after that. Offsetting these obligations, it had cash of NT$2.76b as well as receivables valued at NT$890.3m due within 12 months. So its liabilities total NT$970.6m more than the combination of its cash and short-term receivables.

Of course, Motech Industries has a market capitalization of NT$14.1b, so these liabilities are probably manageable. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if Motech Industries can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Over 12 months, Motech Industries made a loss at the EBIT level, and saw its revenue drop to NT$3.9b, which is a fall of 41%. To be frank that doesn't bode well.

Caveat Emptor

While Motech Industries's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. Indeed, it lost NT$207m at the EBIT level. 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$1.1b of cash over the last year. So suffice it to say we consider the stock very risky. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. We've identified 2 warning signs with Motech Industries (at least 1 which is concerning) , and understanding them should be part of your investment process.

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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