Is Tecstar Technology (GTSM:3117) A Risky Investment?

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.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. Importantly, Tecstar Technology Co., Ltd. (GTSM:3117) does carry debt. But the real question is whether this debt is making the company risky.

When Is Debt A Problem?

Debt assists a business until the business has trouble paying it off, either with new capital or with free 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 common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

View our latest analysis for Tecstar Technology

What Is Tecstar Technology's Net Debt?

As you can see below, Tecstar Technology had NT$418.1m of debt at June 2020, down from NT$446.3m a year prior. On the flip side, it has NT$66.3m in cash leading to net debt of about NT$351.9m.

How Strong Is Tecstar Technology's Balance Sheet?

We can see from the most recent balance sheet that Tecstar Technology had liabilities of NT$425.0m falling due within a year, and liabilities of NT$236.6m due beyond that. Offsetting this, it had NT$66.3m in cash and NT$228.0m in receivables that were due within 12 months. So its liabilities total NT$367.3m more than the combination of its cash and short-term receivables.

This deficit casts a shadow over the NT$136.7m company, like a colossus towering over mere mortals. So we'd watch its balance sheet closely, without a doubt. After all, Tecstar Technology would likely require a major re-capitalisation if it had to pay its creditors today. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Tecstar Technology 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 Tecstar Technology's revenue was pretty flat, and it made a negative EBIT. While that's not too bad, we'd prefer see growth.

Caveat Emptor

Importantly, Tecstar Technology had an earnings before interest and tax (EBIT) loss over the last year. Its EBIT loss was a whopping NT$133m. Combining this information with the significant liabilities we already touched on makes us very hesitant about this stock, to say the least. Of course, it may be able to improve its situation with a bit of luck and good execution. Nevertheless, we would not bet on it given that it vaporized NT$33m in cash over the last twelve months, and it doesn't have much by way of liquid assets. So we think this stock is risky, like walking through a dirty dog park with a mask on. 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. For example, we've discovered 4 warning signs for Tecstar Technology (3 shouldn't be ignored!) that you should be aware of before investing here.

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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