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 the more important question is: how much risk is that debt creating?
What Risk Does Debt Bring?
Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. If things get really bad, the lenders can take control of the business. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. When we examine debt levels, we first consider both cash and debt levels, together.
See our latest analysis for MicroBase Technology
What Is MicroBase Technology's Debt?
The image below, which you can click on for greater detail, shows that at June 2020 MicroBase Technology had debt of NT$220.4m, up from NT$147.7m in one year. But on the other hand it also has NT$407.3m in cash, leading to a NT$186.9m net cash position.
A Look At MicroBase Technology's Liabilities
The latest balance sheet data shows that MicroBase Technology had liabilities of NT$193.7m due within a year, and liabilities of NT$81.7m falling due after that. Offsetting this, it had NT$407.3m in cash and NT$26.2m in receivables that were due within 12 months. So it actually has NT$158.2m more liquid assets than total liabilities.
This short term liquidity is a sign that MicroBase Technology could probably pay off its debt with ease, as its balance sheet is far from stretched. Simply put, the fact that MicroBase Technology has more cash than debt is arguably a good indication that it can manage its debt safely. The balance sheet is clearly the area to focus on when you are analysing debt. But it is MicroBase 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.
In the last year MicroBase Technology had a loss before interest and tax, and actually shrunk its revenue by 17%, to NT$273m. 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 we do note that MicroBase Technology had an earnings before interest and tax (EBIT) loss, over the last year. And over the same period it saw negative free cash outflow of NT$77m and booked a NT$51m accounting loss. With only NT$186.9m on the balance sheet, it would appear that its going to need to raise capital again soon. Overall, its balance sheet doesn't seem overly risky, at the moment, but we're always cautious until we see the positive free cash flow. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. Take risks, for example - MicroBase Technology has 2 warning signs we think you should be aware of.
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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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.
