We Think Laster Tech (TPE:3346) Has A Fair Chunk Of 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.' 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. We can see that Laster Tech Co., Ltd. (TPE:3346) does use debt in its business. But the more important question is: how much risk is that debt creating?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for Laster Tech

What Is Laster Tech's Debt?

The image below, which you can click on for greater detail, shows that at September 2020 Laster Tech had debt of NT$1.91b, up from NT$1.71b in one year. However, it does have NT$673.4m in cash offsetting this, leading to net debt of about NT$1.24b.

How Strong Is Laster Tech's Balance Sheet?

According to the last reported balance sheet, Laster Tech had liabilities of NT$3.08b due within 12 months, and liabilities of NT$456.8m due beyond 12 months. Offsetting this, it had NT$673.4m in cash and NT$1.88b in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by NT$978.9m.

This deficit isn't so bad because Laster Tech is worth NT$3.72b, 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. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Laster Tech's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

In the last year Laster Tech had a loss before interest and tax, and actually shrunk its revenue by 5.0%, to NT$4.1b. We would much prefer see growth.

Caveat Emptor

Over the last twelve months Laster Tech produced an earnings before interest and tax (EBIT) loss. To be specific the EBIT loss came in at NT$54m. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. So we think its balance sheet is a little strained, though not beyond repair. However, it doesn't help that it burned through NT$90m of cash over the last year. So suffice it to say we do consider the stock to be risky. 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 learn about the 3 warning signs we've spotted with Laster Tech (including 1 which doesn't sit too well with us) .

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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