These 4 Measures Indicate That TURVO International (TPE:2233) Is Using Debt Reasonably Well

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 can see that TURVO International Co., Ltd. (TPE:2233) does use debt in its business. But the more important question is: how much risk is that debt creating?

What Risk Does Debt Bring?

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 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, plenty of companies use debt to fund growth, without any negative consequences. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

See our latest analysis for TURVO International

How Much Debt Does TURVO International Carry?

The image below, which you can click on for greater detail, shows that at September 2020 TURVO International had debt of NT$423.3m, up from NT$286.4m in one year. But it also has NT$667.6m in cash to offset that, meaning it has NT$244.3m net cash.

A Look At TURVO International's Liabilities

According to the last reported balance sheet, TURVO International had liabilities of NT$966.3m due within 12 months, and liabilities of NT$305.3m due beyond 12 months. Offsetting these obligations, it had cash of NT$667.6m as well as receivables valued at NT$684.4m due within 12 months. So it can boast NT$80.5m more liquid assets than total liabilities.

Having regard to TURVO International's size, it seems that its liquid assets are well balanced with its total liabilities. So it's very unlikely that the NT$4.97b company is short on cash, but still worth keeping an eye on the balance sheet. Simply put, the fact that TURVO International has more cash than debt is arguably a good indication that it can manage its debt safely.

On the other hand, TURVO International saw its EBIT drop by 4.2% in the last twelve months. That sort of decline, if sustained, will obviously make debt harder to handle. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if TURVO International can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. TURVO International 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. During the last three years, TURVO International produced sturdy free cash flow equating to 75% of its EBIT, about what we'd expect. This free cash flow puts the company in a good position to pay down debt, when appropriate.

Summing up

While it is always sensible to investigate a company's debt, in this case TURVO International has NT$244.3m in net cash and a decent-looking balance sheet. And it impressed us with free cash flow of -NT$73m, being 75% of its EBIT. So is TURVO International's debt a risk? It doesn't seem so to us. 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. Consider for instance, the ever-present spectre of investment risk. We've identified 1 warning sign with TURVO International , and understanding them should be part of your investment process.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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