Here's Why IBASE Technology (GTSM:8050) Can Afford Some Debt

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.' 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 IBASE Technology Inc. (GTSM:8050) makes use of debt. But is this debt a concern to shareholders?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

See our latest analysis for IBASE Technology

What Is IBASE Technology's Debt?

The image below, which you can click on for greater detail, shows that at December 2020 IBASE Technology had debt of NT$3.20b, up from NT$1.64b in one year. However, because it has a cash reserve of NT$1.83b, its net debt is less, at about NT$1.37b.

A Look At IBASE Technology's Liabilities

Zooming in on the latest balance sheet data, we can see that IBASE Technology had liabilities of NT$1.13b due within 12 months and liabilities of NT$2.97b due beyond that. Offsetting this, it had NT$1.83b in cash and NT$846.3m in receivables that were due within 12 months. So its liabilities total NT$1.43b more than the combination of its cash and short-term receivables.

While this might seem like a lot, it is not so bad since IBASE Technology has a market capitalization of NT$6.44b, and so it could probably strengthen its balance sheet by raising capital if it needed to. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. 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 IBASE Technology 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.

Over 12 months, IBASE Technology reported revenue of NT$4.3b, which is a gain of 12%, although it did not report any earnings before interest and tax. We usually like to see faster growth from unprofitable companies, but each to their own.

Caveat Emptor

Over the last twelve months IBASE Technology produced an earnings before interest and tax (EBIT) loss. Indeed, it lost NT$38m at the EBIT level. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. So we think its balance sheet is a little strained, though not beyond repair. However, it doesn't help that it burned through NT$1.2b of cash over the last year. So suffice it to say we consider the stock very risky. 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. Be aware that IBASE Technology is showing 3 warning signs in our investment analysis , and 2 of those can't be ignored...

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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