Is Ta Ya Electric Wire & Cable (TWSE:1609) Using Too Much 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.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. As with many other companies Ta Ya Electric Wire & Cable Co., Ltd. (TWSE:1609) makes use of debt. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

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. If things get really bad, the lenders can take control of the business. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for Ta Ya Electric Wire & Cable

What Is Ta Ya Electric Wire & Cable's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of September 2024 Ta Ya Electric Wire & Cable had NT$32.9b of debt, an increase on NT$24.0b, over one year. However, because it has a cash reserve of NT$9.69b, its net debt is less, at about NT$23.2b.

How Healthy Is Ta Ya Electric Wire & Cable's Balance Sheet?

The latest balance sheet data shows that Ta Ya Electric Wire & Cable had liabilities of NT$19.4b due within a year, and liabilities of NT$18.7b falling due after that. Offsetting these obligations, it had cash of NT$9.69b as well as receivables valued at NT$6.35b due within 12 months. So it has liabilities totalling NT$22.1b more than its cash and near-term receivables, combined.

This deficit is considerable relative to its market capitalization of NT$32.0b, so it does suggest shareholders should keep an eye on Ta Ya Electric Wire & Cable's use of debt. Should its lenders demand that it shore up the balance sheet, shareholders would likely face severe dilution.

In order to size up a company's debt relative to its earnings, we calculate its net debt divided by its earnings before interest, tax, depreciation, and amortization (EBITDA) and its earnings before interest and tax (EBIT) divided by its interest expense (its interest cover). The advantage of this approach is that we take into account both the absolute quantum of debt (with net debt to EBITDA) and the actual interest expenses associated with that debt (with its interest cover ratio).

With a net debt to EBITDA ratio of 7.9, it's fair to say Ta Ya Electric Wire & Cable does have a significant amount of debt. However, its interest coverage of 4.9 is reasonably strong, which is a good sign. It is well worth noting that Ta Ya Electric Wire & Cable's EBIT shot up like bamboo after rain, gaining 61% in the last twelve months. That'll make it easier to manage 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 Ta Ya Electric Wire & Cable's ability to maintain a healthy balance sheet going forward. 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. So it's worth checking how much of that EBIT is backed by free cash flow. Over the last three years, Ta Ya Electric Wire & Cable saw substantial negative free cash flow, in total. While that may be a result of expenditure for growth, it does make the debt far more risky.

Our View

On the face of it, Ta Ya Electric Wire & Cable's net debt to EBITDA left us tentative about the stock, and its conversion of EBIT to free cash flow was no more enticing than the one empty restaurant on the busiest night of the year. But on the bright side, its EBIT growth rate is a good sign, and makes us more optimistic. Once we consider all the factors above, together, it seems to us that Ta Ya Electric Wire & Cable's debt is making it a bit risky. That's not necessarily a bad thing, but we'd generally feel more comfortable with less leverage. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. We've identified 4 warning signs with Ta Ya Electric Wire & Cable (at least 1 which makes us a bit uncomfortable) , 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.

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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.