Is Taiwan Shin Kong SecurityLtd (TPE:9925) A Risky Investment?

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. Importantly, Taiwan Shin Kong Security Co.,Ltd. (TPE:9925) does carry debt. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for Taiwan Shin Kong SecurityLtd

What Is Taiwan Shin Kong SecurityLtd's Net Debt?

As you can see below, at the end of September 2020, Taiwan Shin Kong SecurityLtd had NT$1.90b of debt, up from NT$1.61b a year ago. Click the image for more detail. But on the other hand it also has NT$6.54b in cash, leading to a NT$4.64b net cash position.

A Look At Taiwan Shin Kong SecurityLtd's Liabilities

Zooming in on the latest balance sheet data, we can see that Taiwan Shin Kong SecurityLtd had liabilities of NT$4.52b due within 12 months and liabilities of NT$1.05b due beyond that. Offsetting these obligations, it had cash of NT$6.54b as well as receivables valued at NT$885.0m due within 12 months. So it can boast NT$1.85b more liquid assets than total liabilities.

This short term liquidity is a sign that Taiwan Shin Kong SecurityLtd could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, Taiwan Shin Kong SecurityLtd boasts net cash, so it's fair to say it does not have a heavy debt load!

Also good is that Taiwan Shin Kong SecurityLtd grew its EBIT at 19% over the last year, further increasing its ability to manage debt. When analysing debt levels, the balance sheet is the obvious place to start. But it is Taiwan Shin Kong SecurityLtd's earnings that will influence how the balance sheet holds up in the future. 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.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While Taiwan Shin Kong SecurityLtd has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. During the last three years, Taiwan Shin Kong SecurityLtd generated free cash flow amounting to a very robust 92% of its EBIT, more than we'd expect. That puts it in a very strong position to pay down debt.

Summing up

While we empathize with investors who find debt concerning, you should keep in mind that Taiwan Shin Kong SecurityLtd has net cash of NT$4.64b, as well as more liquid assets than liabilities. And it impressed us with free cash flow of NT$1.0b, being 92% of its EBIT. So is Taiwan Shin Kong SecurityLtd's debt a risk? It doesn't seem so to us. 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. Case in point: We've spotted 1 warning sign for Taiwan Shin Kong SecurityLtd you should be aware of.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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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