Tat Seng Packaging Group (SGX:T12) Seems To Use Debt Rather Sparingly

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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 Tat Seng Packaging Group Ltd (SGX:T12) does use debt in its business. But is this debt a concern to shareholders?

Why Does Debt Bring Risk?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

Check out our latest analysis for Tat Seng Packaging Group

What Is Tat Seng Packaging Group's Debt?

You can click the graphic below for the historical numbers, but it shows that as of December 2020 Tat Seng Packaging Group had S$62.1m of debt, an increase on S$57.5m, over one year. But on the other hand it also has S$72.1m in cash, leading to a S$10.0m 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$108.3m due within a year, and liabilities of S$16.6m falling due after that. On the other hand, it had cash of S$72.1m and S$103.2m worth of receivables due within a year. So it can boast S$50.5m more liquid assets than total liabilities.

This luscious liquidity implies that Tat Seng Packaging Group's balance sheet is sturdy like a giant sequoia tree. Having regard to this fact, we think its balance sheet is as strong as an ox. Simply put, the fact that Tat Seng Packaging Group has more cash than debt is arguably a good indication that it can manage its debt safely.

On top of that, Tat Seng Packaging Group grew its EBIT by 45% over the last twelve months, and that growth will make it easier to handle its debt. The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since Tat Seng Packaging Group will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. Tat Seng Packaging Group may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. During the last three years, Tat Seng Packaging Group produced sturdy free cash flow equating to 61% of its EBIT, about what we'd expect. This free cash flow puts the company in a good position to pay down debt, when appropriate.

Summing up

While we empathize with investors who find debt concerning, you should keep in mind that Tat Seng Packaging Group has net cash of S$10.0m, as well as more liquid assets than liabilities. And it impressed us with its EBIT growth of 45% over the last year. The bottom line is that we do not find Tat Seng Packaging Group's debt levels at all concerning. 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. Be aware that Tat Seng Packaging Group is showing 2 warning signs in our investment analysis , you should know about...

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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