Warren Buffett famously said, ‘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. Importantly, Tung Kai Technology Engineering Co., LTD. (TPE:3018) does carry 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 usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. 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 3 warning signs we detected for Tung Kai Technology Engineering
What Is Tung Kai Technology Engineering’s Debt?
The image below, which you can click on for greater detail, shows that at September 2019 Tung Kai Technology Engineering had debt of NT$304.4m, up from NT$425 in one year. On the flip side, it has NT$106.4m in cash leading to net debt of about NT$198.0m.
How Strong Is Tung Kai Technology Engineering’s Balance Sheet?
According to the last reported balance sheet, Tung Kai Technology Engineering had liabilities of NT$799.8m due within 12 months, and liabilities of NT$54.5m due beyond 12 months. Offsetting this, it had NT$106.4m in cash and NT$760.9m in receivables that were due within 12 months. So its total liabilities are just about perfectly matched by its shorter-term, liquid assets.
Having regard to Tung Kai Technology Engineering’s size, it seems that its liquid assets are well balanced with its total liabilities. So while it’s hard to imagine that the NT$1.65b company is struggling for cash, we still think it’s worth monitoring its balance sheet. When analysing debt levels, the balance sheet is the obvious place to start. But it is Tung Kai Technology Engineering’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, Tung Kai Technology Engineering made a loss at the EBIT level, and saw its revenue drop to NT$1.1b, which is a fall of 27%. To be frank that doesn’t bode well.
Caveat Emptor
While Tung Kai Technology Engineering’s falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. Indeed, it lost a very considerable NT$181m at the EBIT level. Looking on the brighter side, the business has adequate liquid assets, which give it time to grow and develop before its debt becomes a near-term issue. But a profit would do more to inspire us to research the business more closely. This one is a bit too risky for our liking. When we look at a riskier company, we like to check how their profits (or losses) are trending over time. Today, we’re providing readers this interactive graph showing how Tung Kai Technology Engineering’s profit, revenue, and operating cashflow have changed over the last few years.
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.
If you spot an error that warrants correction, please contact the editor at [email protected]. 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. Simply Wall St has no position in the stocks mentioned.
We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Thank you for reading.
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