Is Toplus Global (GTSM:3522) Using Debt Sensibly?

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that '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. As with many other companies Toplus Global Co., Ltd. (GTSM:3522) makes use of debt. But the real question is whether this debt is making the company risky.

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. If things get really bad, the lenders can take control of the business. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for Toplus Global

What Is Toplus Global's Debt?

You can click the graphic below for the historical numbers, but it shows that as of September 2020 Toplus Global had NT$468.9m of debt, an increase on NT$362.4m, over one year. On the flip side, it has NT$136.5m in cash leading to net debt of about NT$332.4m.

A Look At Toplus Global's Liabilities

According to the last reported balance sheet, Toplus Global had liabilities of NT$873.5m due within 12 months, and liabilities of NT$1.08b due beyond 12 months. Offsetting this, it had NT$136.5m in cash and NT$21.9m in receivables that were due within 12 months. So its liabilities total NT$1.80b more than the combination of its cash and short-term receivables.

This deficit casts a shadow over the NT$995.4m company, like a colossus towering over mere mortals. So we'd watch its balance sheet closely, without a doubt. After all, Toplus Global 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 it is Toplus Global'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.

Over 12 months, Toplus Global made a loss at the EBIT level, and saw its revenue drop to NT$959m, which is a fall of 21%. That makes us nervous, to say the least.

Caveat Emptor

Not only did Toplus Global's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). Indeed, it lost a very considerable NT$475m at the EBIT level. When we look at that alongside the significant liabilities, we're not particularly confident about the company. We'd want to see some strong near-term improvements before getting too interested in the stock. It's fair to say the loss of NT$468m didn't encourage us either; we'd like to see a profit. In the meantime, we consider the stock to be risky. 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. Be aware that Toplus Global is showing 2 warning signs in our investment analysis , and 1 of those is concerning...

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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