David Iben put it well when he said, ‘Volatility is not a risk we care about. What we care about is avoiding the 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. We can see that Taiwan Union Technology Corporation (GTSM:6274) does use debt in its business. But the more important question is: how much risk is that debt creating?
Why Does Debt Bring Risk?
Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. If things get really bad, the lenders can take control of the business. 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, plenty of companies use debt to fund growth, without any negative consequences. The first step when considering a company’s debt levels is to consider its cash and debt together.
See our latest analysis for Taiwan Union Technology
What Is Taiwan Union Technology’s Net Debt?
As you can see below, at the end of September 2019, Taiwan Union Technology had NT$2.08b of debt, up from NT$2.5k a year ago. Click the image for more detail. But it also has NT$3.99b in cash to offset that, meaning it has NT$1.91b net cash.
How Strong Is Taiwan Union Technology’s Balance Sheet?
According to the last reported balance sheet, Taiwan Union Technology had liabilities of NT$6.35b due within 12 months, and liabilities of NT$1.14b due beyond 12 months. Offsetting this, it had NT$3.99b in cash and NT$5.93b in receivables that were due within 12 months. So it can boast NT$2.44b more liquid assets than total liabilities.
This short term liquidity is a sign that Taiwan Union Technology could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, Taiwan Union Technology boasts net cash, so it’s fair to say it does not have a heavy debt load!
Fortunately, Taiwan Union Technology grew its EBIT by 7.4% in the last year, making that debt load look even more manageable. There’s no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if Taiwan Union Technology can strengthen its balance sheet over time. So if you’re focused on the future you can check out this free report showing analyst profit forecasts.
But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. While Taiwan Union Technology has net cash on its balance sheet, it’s still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. In the last three years, Taiwan Union Technology’s free cash flow amounted to 33% of its EBIT, less than we’d expect. That weak cash conversion makes it more difficult to handle indebtedness.
While it is always sensible to investigate a company’s debt, in this case Taiwan Union Technology has NT$1.91b in net cash and a decent-looking balance sheet. On top of that, it increased its EBIT by 7.4% in the last twelve months. So we don’t have any problem with Taiwan Union Technology’s use of debt. 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, we’ve discovered 1 warning sign for Taiwan Union Technology which any shareholder or potential investor should be aware of.
If you’re interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.
If you spot an error that warrants correction, please contact the editor at firstname.lastname@example.org. 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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