Would Tayih Kenmos Auto parts (GTSM:8107) Be Better Off With Less Debt?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. As with many other companies Tayih Kenmos Auto parts Co., Ltd. (GTSM:8107) makes use of debt. But the more important question is: how much risk is that debt creating?

When Is Debt Dangerous?

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. 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.

View our latest analysis for Tayih Kenmos Auto parts

How Much Debt Does Tayih Kenmos Auto parts Carry?

The image below, which you can click on for greater detail, shows that at September 2020 Tayih Kenmos Auto parts had debt of NT$673.0m, up from NT$464.4m in one year. On the flip side, it has NT$189.1m in cash leading to net debt of about NT$484.0m.

A Look At Tayih Kenmos Auto parts' Liabilities

We can see from the most recent balance sheet that Tayih Kenmos Auto parts had liabilities of NT$309.6m falling due within a year, and liabilities of NT$634.8m due beyond that. On the other hand, it had cash of NT$189.1m and NT$281.6m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by NT$473.7m.

Tayih Kenmos Auto parts has a market capitalization of NT$1.63b, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Tayih Kenmos Auto parts'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.

Over 12 months, Tayih Kenmos Auto parts made a loss at the EBIT level, and saw its revenue drop to NT$642m, which is a fall of 27%. 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$70m at the EBIT level. 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 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. However, not all investment risk resides within the balance sheet - far from it. We've identified 4 warning signs with Tayih Kenmos Auto parts (at least 2 which make us uncomfortable) , and understanding them should be part of your investment process.

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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This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.
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