Does Tayih Kenmos Auto parts (GTSM:8107) Have A Healthy Balance Sheet?

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. We note that Tayih Kenmos Auto parts Co., Ltd. (GTSM:8107) does have debt on its balance sheet. But is this debt a concern to shareholders?

When Is Debt A Problem?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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, debt can be an important tool in businesses, particularly capital heavy businesses. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for Tayih Kenmos Auto parts

How Much Debt Does Tayih Kenmos Auto parts Carry?

You can click the graphic below for the historical numbers, but it shows that as of September 2020 Tayih Kenmos Auto parts had NT$676.1m of debt, an increase on NT$464.4m, over one year. However, it does have NT$189.1m in cash offsetting this, leading to net debt of about NT$487.0m.

How Healthy Is Tayih Kenmos Auto parts's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Tayih Kenmos Auto parts had liabilities of NT$309.6m due within 12 months and liabilities of NT$634.8m due beyond that. Offsetting these obligations, it had cash of NT$189.1m as well as receivables valued at NT$281.6m due within 12 months. So it has liabilities totalling NT$473.7m more than its cash and near-term receivables, combined.

While this might seem like a lot, it is not so bad since Tayih Kenmos Auto parts has a market capitalization of NT$1.28b, and so it could probably strengthen its balance sheet by raising capital if it needed to. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Tayih Kenmos Auto parts 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.

In the last year Tayih Kenmos Auto parts had a loss before interest and tax, and actually shrunk its revenue by 27%, to NT$642m. To be frank that doesn't bode well.

Caveat Emptor

While Tayih Kenmos Auto parts's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. Indeed, it lost NT$68m at the EBIT level. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. So we think its balance sheet is a little strained, though not beyond repair. However, it doesn't help that it burned through NT$95m of cash over the last year. So in short it's a really risky stock. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. To that end, you should learn about the 4 warning signs we've spotted with Tayih Kenmos Auto parts (including 2 which is can't be ignored) .

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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