We Think TECO Electric & Machinery (TWSE:1504) Can Stay On Top Of Its 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.' 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 TECO Electric & Machinery Co., Ltd. (TWSE:1504) makes use of debt. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for TECO Electric & Machinery

What Is TECO Electric & Machinery's Net Debt?

As you can see below, TECO Electric & Machinery had NT$9.64b of debt at June 2024, down from NT$10.7b a year prior. However, its balance sheet shows it holds NT$25.4b in cash, so it actually has NT$15.7b net cash.

How Healthy Is TECO Electric & Machinery's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that TECO Electric & Machinery had liabilities of NT$30.3b due within 12 months and liabilities of NT$14.2b due beyond that. On the other hand, it had cash of NT$25.4b and NT$16.8b worth of receivables due within a year. So it has liabilities totalling NT$2.36b more than its cash and near-term receivables, combined.

Of course, TECO Electric & Machinery has a market capitalization of NT$103.6b, so these liabilities are probably manageable. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. Despite its noteworthy liabilities, TECO Electric & Machinery boasts net cash, so it's fair to say it does not have a heavy debt load!

Fortunately, TECO Electric & Machinery grew its EBIT by 5.2% in the last year, making that debt load look even more manageable. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if TECO Electric & Machinery 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, while the tax-man may adore accounting profits, lenders only accept cold hard cash. TECO Electric & Machinery 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. Looking at the most recent three years, TECO Electric & Machinery recorded free cash flow of 50% of its EBIT, which is weaker than we'd expect. That's not great, when it comes to paying down debt.

Summing Up

While it is always sensible to look at a company's total liabilities, it is very reassuring that TECO Electric & Machinery has NT$15.7b in net cash. On top of that, it increased its EBIT by 5.2% in the last twelve months. So we don't have any problem with TECO Electric & Machinery's use of debt. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. We've identified 1 warning sign with TECO Electric & Machinery , and understanding them should be part of your investment process.

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.