Is Tong Yang Industry (TWSE:1319) A Risky Investment?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. We can see that Tong Yang Industry Co., Ltd. (TWSE:1319) does use debt in its business. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for Tong Yang Industry

What Is Tong Yang Industry's Debt?

As you can see below, Tong Yang Industry had NT$1.99b of debt at September 2024, down from NT$2.85b a year prior. However, it does have NT$2.95b in cash offsetting this, leading to net cash of NT$956.6m.

A Look At Tong Yang Industry's Liabilities

We can see from the most recent balance sheet that Tong Yang Industry had liabilities of NT$6.26b falling due within a year, and liabilities of NT$1.80b due beyond that. Offsetting this, it had NT$2.95b in cash and NT$5.01b in receivables that were due within 12 months. So these liquid assets roughly match the total liabilities.

Having regard to Tong Yang Industry's size, it seems that its liquid assets are well balanced with its total liabilities. So it's very unlikely that the NT$68.6b company is short on cash, but still worth keeping an eye on the balance sheet. While it does have liabilities worth noting, Tong Yang Industry also has more cash than debt, so we're pretty confident it can manage its debt safely.

On top of that, Tong Yang Industry grew its EBIT by 48% over the last twelve months, and that growth will make it easier to handle its debt. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine Tong Yang Industry's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. Tong Yang Industry may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. Over the last three years, Tong Yang Industry actually produced more free cash flow than EBIT. That sort of strong cash generation warms our hearts like a puppy in a bumblebee suit.

Summing Up

We could understand if investors are concerned about Tong Yang Industry's liabilities, but we can be reassured by the fact it has has net cash of NT$956.6m. And it impressed us with free cash flow of NT$3.0b, being 105% of its EBIT. So is Tong Yang Industry's debt a risk? It doesn't seem so to us. 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. Be aware that Tong Yang Industry is showing 1 warning sign in our investment analysis , you should know about...

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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.