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

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. As with many other companies Tat Seng Packaging Group Ltd (SGX:T12) makes use of debt. But the real question is whether this debt is making the company risky.

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. 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. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. 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 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 it also has S$72.1m in cash to offset that, meaning it has S$10.0m net cash.

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

We can see from the most recent balance sheet that Tat Seng Packaging Group had liabilities of S$108.3m falling due within a year, and liabilities of S$16.6m due beyond that. Offsetting these obligations, it had cash of S$72.1m as well as receivables valued at S$103.2m due within 12 months. So it actually has S$50.5m more liquid assets than total liabilities.

This surplus liquidity suggests that Tat Seng Packaging Group's balance sheet could take a hit just as well as Homer Simpson's head can take a punch. With this in mind one could posit that its balance sheet means the company is able to handle some adversity. 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.

In addition to that, we're happy to report that Tat Seng Packaging Group has boosted its EBIT by 58%, 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 Tat Seng Packaging Group'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, 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. During the last three years, Tat Seng Packaging Group produced sturdy free cash flow equating to 58% of its EBIT, about what we'd expect. This cold hard cash means it can reduce its debt when it wants to.

Summing up

While it is always sensible to investigate a company's debt, in this case Tat Seng Packaging Group has S$10.0m in net cash and a decent-looking balance sheet. And it impressed us with its EBIT growth of 58% over the last year. So is Tat Seng Packaging Group's debt a risk? It doesn't seem so to us. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. To that end, you should be aware of the 2 warning signs we've spotted with Tat Seng Packaging Group .

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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