Is Teco Image SystemsLtd (GTSM:5438) Using Debt In A Risky Way?

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.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. As with many other companies Teco Image Systems Co.,Ltd. (GTSM:5438) makes use of debt. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for Teco Image SystemsLtd

How Much Debt Does Teco Image SystemsLtd Carry?

You can click the graphic below for the historical numbers, but it shows that as of September 2020 Teco Image SystemsLtd had NT$150.0m of debt, an increase on none, over one year. However, its balance sheet shows it holds NT$407.0m in cash, so it actually has NT$257.0m net cash.

How Strong Is Teco Image SystemsLtd's Balance Sheet?

The latest balance sheet data shows that Teco Image SystemsLtd had liabilities of NT$653.1m due within a year, and liabilities of NT$36.7m falling due after that. Offsetting this, it had NT$407.0m in cash and NT$405.7m in receivables that were due within 12 months. So it can boast NT$122.9m more liquid assets than total liabilities.

This short term liquidity is a sign that Teco Image SystemsLtd could probably pay off its debt with ease, as its balance sheet is far from stretched. Simply put, the fact that Teco Image SystemsLtd 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 you can't view debt in total isolation; since Teco Image SystemsLtd will need earnings to service that debt. 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 Teco Image SystemsLtd had a loss before interest and tax, and actually shrunk its revenue by 29%, to NT$1.4b. To be frank that doesn't bode well.

So How Risky Is Teco Image SystemsLtd?

We have no doubt that loss making companies are, in general, riskier than profitable ones. And we do note that Teco Image SystemsLtd 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$12m and booked a NT$20m accounting loss. Given it only has net cash of NT$257.0m, the company may need to raise more capital if it doesn't reach break-even 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. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. To that end, you should learn about the 3 warning signs we've spotted with Teco Image SystemsLtd (including 1 which is can't be ignored) .

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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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