Would T-Flex Techvest PCB (GTSM:3276) Be Better Off With Less Debt?

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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. As with many other companies T-Flex Techvest PCB Co., Ltd. (GTSM:3276) makes use of 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 frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for T-Flex Techvest PCB

What Is T-Flex Techvest PCB's Net Debt?

You can click the graphic below for the historical numbers, but it shows that T-Flex Techvest PCB had NT$619.1m of debt in September 2020, down from NT$722.8m, one year before. However, because it has a cash reserve of NT$458.5m, its net debt is less, at about NT$160.7m.

How Strong Is T-Flex Techvest PCB's Balance Sheet?

We can see from the most recent balance sheet that T-Flex Techvest PCB had liabilities of NT$1.33b falling due within a year, and liabilities of NT$215.1m due beyond that. Offsetting this, it had NT$458.5m in cash and NT$449.1m in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by NT$640.3m.

This is a mountain of leverage relative to its market capitalization of NT$871.4m. This suggests shareholders would be heavily diluted if the company needed to shore up its balance sheet in a hurry. When analysing debt levels, the balance sheet is the obvious place to start. But it is T-Flex Techvest PCB'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.

Over 12 months, T-Flex Techvest PCB reported revenue of NT$1.1b, which is a gain of 21%, although it did not report any earnings before interest and tax. Shareholders probably have their fingers crossed that it can grow its way to profits.

Caveat Emptor

Despite the top line growth, T-Flex Techvest PCB still had an earnings before interest and tax (EBIT) loss over the last year. Indeed, it lost a very considerable NT$175m at the EBIT level. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. Another cause for caution is that is bled NT$313m in negative free cash flow over the last twelve months. So in short it's a really risky stock. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. For example T-Flex Techvest PCB has 3 warning signs (and 2 which are potentially serious) we think you should know about.

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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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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