Is Taiwan Takisawa Technology (GTSM:6609) A Risky Investment?

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.' 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. We note that Taiwan Takisawa Technology Co., Ltd. (GTSM:6609) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for Taiwan Takisawa Technology

What Is Taiwan Takisawa Technology's Net Debt?

As you can see below, at the end of September 2020, Taiwan Takisawa Technology had NT$1.07b of debt, up from NT$757.8m a year ago. Click the image for more detail. However, it does have NT$1.24b in cash offsetting this, leading to net cash of NT$170.9m.

How Healthy Is Taiwan Takisawa Technology's Balance Sheet?

According to the last reported balance sheet, Taiwan Takisawa Technology had liabilities of NT$1.54b due within 12 months, and liabilities of NT$424.7m due beyond 12 months. Offsetting this, it had NT$1.24b in cash and NT$641.4m in receivables that were due within 12 months. So its liabilities total NT$80.9m more than the combination of its cash and short-term receivables.

Since publicly traded Taiwan Takisawa Technology shares are worth a total of NT$1.89b, it seems unlikely that this level of liabilities would be a major threat. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. While it does have liabilities worth noting, Taiwan Takisawa Technology also has more cash than debt, so we're pretty confident it can manage its debt safely.

In fact Taiwan Takisawa Technology's saving grace is its low debt levels, because its EBIT has tanked 51% in the last twelve months. Falling earnings (if the trend continues) could eventually make even modest debt quite risky. 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 Taiwan Takisawa Technology'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, a company can only pay off debt with cold hard cash, not accounting profits. Taiwan Takisawa Technology 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. In the last three years, Taiwan Takisawa Technology created free cash flow amounting to 20% of its EBIT, an uninspiring performance. That limp level of cash conversion undermines its ability to manage and pay down debt.

Summing up

While it is always sensible to look at a company's total liabilities, it is very reassuring that Taiwan Takisawa Technology has NT$170.9m in net cash. So we don't have any problem with Taiwan Takisawa Technology's use of debt. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. For example, we've discovered 5 warning signs for Taiwan Takisawa Technology (2 don't sit too well with us!) that you should be aware of before investing here.

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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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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