Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. We can see that MicroBase Technology Corp. (GTSM:3184) does use debt in its business. 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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. 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 MicroBase Technology
What Is MicroBase Technology's Net Debt?
As you can see below, MicroBase Technology had NT$112.7m of debt at December 2020, down from NT$203.5m a year prior. However, its balance sheet shows it holds NT$286.4m in cash, so it actually has NT$173.7m net cash.
How Healthy Is MicroBase Technology's Balance Sheet?
We can see from the most recent balance sheet that MicroBase Technology had liabilities of NT$129.7m falling due within a year, and liabilities of NT$57.7m due beyond that. On the other hand, it had cash of NT$286.4m and NT$22.0m worth of receivables due within a year. So it actually has NT$120.9m more liquid assets than total liabilities.
This surplus suggests that MicroBase Technology has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Simply put, the fact that MicroBase Technology has more cash than debt is arguably a good indication that it can manage its debt safely. There's no doubt that we learn most about debt from the balance sheet. But it is MicroBase Technology's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.
In the last year MicroBase Technology had a loss before interest and tax, and actually shrunk its revenue by 5.9%, to NT$250m. That's not what we would hope to see.
So How Risky Is MicroBase Technology?
By their very nature companies that are losing money are more risky than those with a long history of profitability. And the fact is that over the last twelve months MicroBase Technology lost money at the earnings before interest and tax (EBIT) line. Indeed, in that time it burnt through NT$88m of cash and made a loss of NT$74m. Given it only has net cash of NT$173.7m, the company may need to raise more capital if it doesn't reach break-even soon. Even though its balance sheet seems sufficiently liquid, debt always makes us a little nervous if a company doesn't produce free cash flow regularly. 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 - MicroBase Technology has 2 warning signs we think you should be aware of.
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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About TPEX:3184
MicroBase Technology
Provides drug delivery systems to patients and healthcare professionals in Taiwan.
Flawless balance sheet with solid track record.
