Here's Why Tung Kai Technology Engineering (TPE:3018) Can Afford Some Debt

Warren Buffett famously said, '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. As with many other companies Tung Kai Technology Engineering Co., LTD. (TPE:3018) makes use of debt. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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, 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.

Check out our latest analysis for Tung Kai Technology Engineering

What Is Tung Kai Technology Engineering's Debt?

You can click the graphic below for the historical numbers, but it shows that Tung Kai Technology Engineering had NT$271.7m of debt in September 2020, down from NT$304.4m, one year before. However, it also had NT$241.3m in cash, and so its net debt is NT$30.4m.

How Healthy Is Tung Kai Technology Engineering's Balance Sheet?

We can see from the most recent balance sheet that Tung Kai Technology Engineering had liabilities of NT$714.3m falling due within a year, and liabilities of NT$143.2m due beyond that. Offsetting these obligations, it had cash of NT$241.3m as well as receivables valued at NT$560.2m due within 12 months. So it has liabilities totalling NT$56.0m more than its cash and near-term receivables, combined.

Given Tung Kai Technology Engineering has a market capitalization of NT$1.43b, it's hard to believe these liabilities pose much threat. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Tung Kai Technology Engineering will need earnings to service that debt. 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.

Over 12 months, Tung Kai Technology Engineering reported revenue of NT$1.4b, which is a gain of 37%, although it did not report any earnings before interest and tax. Shareholders probably have their fingers crossed that it can grow its way to profits.

Caveat Emptor

While we can certainly appreciate Tung Kai Technology Engineering's revenue growth, its earnings before interest and tax (EBIT) loss is not ideal. Indeed, it lost a very considerable NT$212m at the EBIT level. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. So we think its balance sheet is a little strained, though not beyond repair. For example, we would not want to see a repeat of last year's loss of NT$176m. So to be blunt we do think it is risky. 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 2 warning signs for Tung Kai Technology Engineering (1 shouldn't be ignored!) that you should be aware of before investing here.

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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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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