Does Tecstar Technology (GTSM:3117) Have A Healthy Balance Sheet?

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, Tecstar Technology Co., Ltd. (GTSM:3117) does carry debt. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. 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, 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 step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for Tecstar Technology

What Is Tecstar Technology's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of December 2020 Tecstar Technology had NT$445.6m of debt, an increase on NT$421.7m, over one year. However, it does have NT$25.2m in cash offsetting this, leading to net debt of about NT$420.4m.

How Healthy Is Tecstar Technology's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Tecstar Technology had liabilities of NT$402.3m due within 12 months and liabilities of NT$249.8m due beyond that. On the other hand, it had cash of NT$25.2m and NT$225.3m worth of receivables due within a year. So its liabilities total NT$401.6m more than the combination of its cash and short-term receivables.

The deficiency here weighs heavily on the NT$226.1m company itself, as if a child were struggling under the weight of an enormous back-pack full of books, his sports gear, and a trumpet. So we definitely think shareholders need to watch this one closely. After all, Tecstar Technology would likely require a major re-capitalisation if it had to pay its creditors today. There's no doubt that we learn most about debt from the balance sheet. But it is Tecstar Technology's earnings that will influence how the balance sheet holds up in the future. 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.

Over 12 months, Tecstar Technology reported revenue of NT$632m, which is a gain of 29%, although it did not report any earnings before interest and tax. With any luck the company will be able to grow its way to profitability.

Caveat Emptor

Despite the top line growth, Tecstar Technology still had an earnings before interest and tax (EBIT) loss over the last year. Its EBIT loss was a whopping NT$67m. Considering that alongside the liabilities mentioned above make us nervous 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$50m in negative free cash flow over the last year. That means it's on the risky side of things. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. For example Tecstar Technology has 4 warning signs (and 3 which make us uncomfortable) we think you should know about.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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