Tsang Yow IndustrialLtd (TPE:1568) Is Making Moderate Use Of Debt

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. Importantly, Tsang Yow Industrial Co.,Ltd. (TPE:1568) does carry debt. But the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. 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. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for Tsang Yow IndustrialLtd

What Is Tsang Yow IndustrialLtd's Debt?

The chart below, which you can click on for greater detail, shows that Tsang Yow IndustrialLtd had NT$1.25b in debt in September 2020; about the same as the year before. On the flip side, it has NT$308.3m in cash leading to net debt of about NT$946.3m.

How Healthy Is Tsang Yow IndustrialLtd's Balance Sheet?

The latest balance sheet data shows that Tsang Yow IndustrialLtd had liabilities of NT$849.9m due within a year, and liabilities of NT$829.3m falling due after that. Offsetting these obligations, it had cash of NT$308.3m as well as receivables valued at NT$643.8m due within 12 months. So its liabilities total NT$727.1m more than the combination of its cash and short-term receivables.

While this might seem like a lot, it is not so bad since Tsang Yow IndustrialLtd has a market capitalization of NT$1.83b, 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. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Tsang Yow IndustrialLtd'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.

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. That's not what we would hope to see.

Caveat Emptor

Not only did Tsang Yow IndustrialLtd's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). 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. So we think its balance sheet is a little strained, though not beyond repair. 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 one might argue that there's still a chance it can get things on the right track. 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. Be aware that Tsang Yow IndustrialLtd is showing 6 warning signs in our investment analysis , and 2 of those are potentially serious...

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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