Does Tsang Yow IndustrialLtd (TPE:1568) Have A Healthy Balance Sheet?

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that '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. We note that Tsang Yow Industrial Co.,Ltd. (TPE:1568) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

When Is Debt A Problem?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. If things get really bad, the lenders can take control of the business. 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. 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. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for Tsang Yow IndustrialLtd

What Is Tsang Yow IndustrialLtd's Debt?

As you can see below, Tsang Yow IndustrialLtd had NT$1.25b of debt, at September 2020, which is about the same as the year before. You can click the chart for greater detail. However, because it has a cash reserve of NT$308.3m, its net debt is less, at about NT$946.3m.

A Look At Tsang Yow IndustrialLtd's Liabilities

Zooming in on the latest balance sheet data, we can see that Tsang Yow IndustrialLtd had liabilities of NT$849.9m due within 12 months and liabilities of NT$829.3m due beyond that. Offsetting this, it had NT$308.3m in cash and NT$643.8m in receivables that were due within 12 months. So it has liabilities totalling NT$727.1m more than its cash and near-term receivables, combined.

This deficit isn't so bad because Tsang Yow IndustrialLtd is worth NT$2.88b, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. However, it is still worthwhile taking a close look at its ability to pay off debt. When analysing debt levels, the balance sheet is the obvious place to start. But it is Tsang Yow IndustrialLtd's earnings that will influence how the balance sheet holds up in the future. 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 Tsang Yow IndustrialLtd had a loss before interest and tax, and actually shrunk its revenue by 12%, to NT$1.8b. We would much prefer see growth.

Caveat Emptor

While Tsang Yow IndustrialLtd'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$22m 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. On the bright side, we note that trailing twelve month EBIT is worse than the free cash flow of NT$112m and the profit of NT$7.0m. So if we focus on those metrics there seems to be a chance the company will manage its debt without much trouble. 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. For example Tsang Yow IndustrialLtd has 5 warning signs (and 2 which are a bit unpleasant) we think 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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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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