Is MetaTech (AP) (GTSM:3224) Using Too Much 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.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. As with many other companies MetaTech (AP) Inc. (GTSM:3224) makes use of debt. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

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. If things get really bad, the lenders can take control of the business. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for MetaTech (AP)

What Is MetaTech (AP)'s Debt?

The image below, which you can click on for greater detail, shows that at September 2020 MetaTech (AP) had debt of NT$257.8m, up from NT$144.2m in one year. But it also has NT$341.3m in cash to offset that, meaning it has NT$83.5m net cash.

A Look At MetaTech (AP)'s Liabilities

The latest balance sheet data shows that MetaTech (AP) had liabilities of NT$303.4m due within a year, and liabilities of NT$274.0m falling due after that. Offsetting these obligations, it had cash of NT$341.3m as well as receivables valued at NT$346.7m due within 12 months. So it actually has NT$110.5m more liquid assets than total liabilities.

This surplus suggests that MetaTech (AP) has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Simply put, the fact that MetaTech (AP) 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 you can't view debt in total isolation; since MetaTech (AP) will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

In the last year MetaTech (AP) wasn't profitable at an EBIT level, but managed to grow its revenue by 15%, to NT$1.6b. We usually like to see faster growth from unprofitable companies, but each to their own.

So How Risky Is MetaTech (AP)?

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 MetaTech (AP) lost money at the earnings before interest and tax (EBIT) line. Indeed, in that time it burnt through NT$78m of cash and made a loss of NT$74m. However, it has net cash of NT$83.5m, so it has a bit of time before it will need more capital. 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. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. Case in point: We've spotted 2 warning signs for MetaTech (AP) you should be aware of, and 1 of them is a bit unpleasant.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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