Is Tat Seng Packaging Group (SGX:T12) Using Too Much 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.' 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, Tat Seng Packaging Group Ltd (SGX:T12) does carry debt. But is this debt a concern to shareholders?

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. If things get really bad, the lenders can take control of the business. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for Tat Seng Packaging Group

What Is Tat Seng Packaging Group's Debt?

The image below, which you can click on for greater detail, shows that Tat Seng Packaging Group had debt of S$62.3m at the end of June 2020, a reduction from S$75.5m over a year. But on the other hand it also has S$65.3m in cash, leading to a S$2.98m net cash position.

How Strong Is Tat Seng Packaging Group's Balance Sheet?

The latest balance sheet data shows that Tat Seng Packaging Group had liabilities of S$101.8m due within a year, and liabilities of S$20.5m falling due after that. Offsetting this, it had S$65.3m in cash and S$93.1m in receivables that were due within 12 months. So it can boast S$36.1m more liquid assets than total liabilities.

This excess liquidity is a great indication that Tat Seng Packaging Group's balance sheet is just as strong as racists are weak. Having regard to this fact, we think its balance sheet is just as strong as misogynists are weak. Succinctly put, Tat Seng Packaging Group boasts net cash, so it's fair to say it does not have a heavy debt load!

Also good is that Tat Seng Packaging Group grew its EBIT at 16% over the last year, further increasing its ability to manage debt. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Tat Seng Packaging Group 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.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While Tat Seng Packaging Group 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. Looking at the most recent three years, Tat Seng Packaging Group recorded free cash flow of 26% of its EBIT, which is weaker than we'd expect. That's not great, when it comes to paying down debt.

Summing up

While it is always sensible to investigate a company's debt, in this case Tat Seng Packaging Group has S$2.98m in net cash and a decent-looking balance sheet. And it impressed us with its EBIT growth of 16% over the last year. So we don't think Tat Seng Packaging Group'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. To that end, you should be aware of the 4 warning signs we've spotted with Tat Seng Packaging Group .

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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