Tapex (KRX:055490) Has A Rock Solid Balance Sheet

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.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. We can see that Tapex Co., Ltd. (KRX:055490) does use debt in its business. But the more important question is: how much risk is that debt creating?

What Risk Does Debt Bring?

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 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.

See our latest analysis for Tapex

How Much Debt Does Tapex Carry?

You can click the graphic below for the historical numbers, but it shows that Tapex had ₩15.2b of debt in September 2020, down from ₩31.8b, one year before. However, its balance sheet shows it holds ₩32.7b in cash, so it actually has ₩17.5b net cash.

How Strong Is Tapex's Balance Sheet?

According to the last reported balance sheet, Tapex had liabilities of ₩35.4b due within 12 months, and liabilities of ₩11.6b due beyond 12 months. Offsetting this, it had ₩32.7b in cash and ₩17.6b in receivables that were due within 12 months. So it actually has ₩3.26b more liquid assets than total liabilities.

Having regard to Tapex's size, it seems that its liquid assets are well balanced with its total liabilities. So while it's hard to imagine that the ₩177.4b company is struggling for cash, we still think it's worth monitoring its balance sheet. Succinctly put, Tapex boasts net cash, so it's fair to say it does not have a heavy debt load!

In addition to that, we're happy to report that Tapex has boosted its EBIT by 77%, thus reducing the spectre of future debt repayments. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Tapex'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.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. While Tapex 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. Over the last three years, Tapex recorded free cash flow worth a fulsome 98% of its EBIT, which is stronger than we'd usually expect. That puts it in a very strong position to pay down debt.

Summing up

While it is always sensible to investigate a company's debt, in this case Tapex has ₩17.5b in net cash and a decent-looking balance sheet. The cherry on top was that in converted 98% of that EBIT to free cash flow, bringing in ₩15b. So we don't think Tapex's use of debt is risky. 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. Consider for instance, the ever-present spectre of investment risk. We've identified 2 warning signs with Tapex , and understanding them should be part of your investment process.

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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