Taihan Fiber Optics (KOSDAQ:010170) Is Carrying A Fair Bit Of Debt

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. Importantly, Taihan Fiber Optics Co., Ltd (KOSDAQ:010170) does carry debt. But is this debt a concern to shareholders?

When Is Debt A Problem?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. 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 Taihan Fiber Optics

What Is Taihan Fiber Optics's Net Debt?

The chart below, which you can click on for greater detail, shows that Taihan Fiber Optics had ₩82.3b in debt in September 2020; about the same as the year before. However, it does have ₩64.6b in cash offsetting this, leading to net debt of about ₩17.7b.

How Strong Is Taihan Fiber Optics' Balance Sheet?

According to the last reported balance sheet, Taihan Fiber Optics had liabilities of ₩75.2b due within 12 months, and liabilities of ₩46.4b due beyond 12 months. Offsetting these obligations, it had cash of ₩64.6b as well as receivables valued at ₩39.2b due within 12 months. So it has liabilities totalling ₩17.8b more than its cash and near-term receivables, combined.

Of course, Taihan Fiber Optics has a market capitalization of ₩260.3b, so these liabilities are probably manageable. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Taihan Fiber Optics 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.

Over 12 months, Taihan Fiber Optics made a loss at the EBIT level, and saw its revenue drop to ₩136b, which is a fall of 17%. That's not what we would hope to see.

Caveat Emptor

Not only did Taihan Fiber Optics's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). To be specific the EBIT loss came in at ₩24b. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. However, it doesn't help that it burned through ₩6.5b of cash over the last year. So to be blunt we think it is risky. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. To that end, you should be aware of the 1 warning sign we've spotted with Taihan Fiber Optics .

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.

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