Taiwan Shin Kong SecurityLtd (TPE:9925) Seems To Use Debt Rather Sparingly

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. 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.

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

See our latest analysis for Taiwan Shin Kong SecurityLtd

What Is Taiwan Shin Kong SecurityLtd's Net Debt?

The image below, which you can click on for greater detail, shows that at December 2020 Taiwan Shin Kong SecurityLtd had debt of NT$1.95b, up from NT$1.60b in one year. But it also has NT$6.83b in cash to offset that, meaning it has NT$4.88b net cash.

How Strong Is Taiwan Shin Kong SecurityLtd's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Taiwan Shin Kong SecurityLtd had liabilities of NT$4.84b due within 12 months and liabilities of NT$1.04b due beyond that. On the other hand, it had cash of NT$6.83b and NT$1.20b worth of receivables due within a year. So it can boast NT$2.15b more liquid assets than total liabilities.

This surplus suggests that Taiwan Shin Kong SecurityLtd has a conservative balance sheet, and could probably eliminate its debt without much difficulty. 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 11% over the last year, further increasing its ability to manage debt. The balance sheet is clearly the area to focus on when you are analysing debt. 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, a business needs free cash flow to pay off debt; accounting profits just don't cut it. 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 81% 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$4.88b, as well as more liquid assets than liabilities. The cherry on top was that in converted 81% of that EBIT to free cash flow, bringing in NT$628m. So we don't think Taiwan Shin Kong SecurityLtd's use of debt is risky. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. These risks can be hard to spot. Every company has them, and we've spotted 1 warning sign for Taiwan Shin Kong SecurityLtd you should know about.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

If you’re looking to trade Taiwan Shin Kong SecurityLtd, open an account with the lowest-cost* platform trusted by professionals, Interactive Brokers. Their clients from over 200 countries and territories trade stocks, options, futures, forex, bonds and funds worldwide from a single integrated account. Promoted

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.
^*Interactive Brokers Rated Lowest Cost Broker by StockBrokers.com Annual Online Review 2020

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