Tainan Spinning (TPE:1440) Is Carrying A Fair Bit Of 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. We note that Tainan Spinning Co., Ltd. (TPE:1440) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. If things get really bad, the lenders can take control of the business. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for Tainan Spinning

What Is Tainan Spinning's Net Debt?

As you can see below, at the end of December 2020, Tainan Spinning had NT$14.0b of debt, up from NT$12.3b a year ago. Click the image for more detail. However, it also had NT$5.60b in cash, and so its net debt is NT$8.40b.

How Strong Is Tainan Spinning's Balance Sheet?

The latest balance sheet data shows that Tainan Spinning had liabilities of NT$12.7b due within a year, and liabilities of NT$8.91b falling due after that. Offsetting this, it had NT$5.60b in cash and NT$2.05b in receivables that were due within 12 months. So its liabilities total NT$13.9b more than the combination of its cash and short-term receivables.

This deficit isn't so bad because Tainan Spinning is worth NT$26.4b, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. But it's clear that we should definitely closely examine whether it can manage its debt without dilution. When analysing debt levels, the balance sheet is the obvious place to start. But it is Tainan Spinning'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.

In the last year Tainan Spinning had a loss before interest and tax, and actually shrunk its revenue by 23%, to NT$18b. To be frank that doesn't bode well.

Caveat Emptor

Not only did Tainan Spinning's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). To be specific the EBIT loss came in at NT$189m. 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. On the bright side, we note that trailing twelve month EBIT is worse than the free cash flow of NT$315m and the profit of NT$936m. So one might argue that there's still a chance it can get things on the right track. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. For example Tainan Spinning has 3 warning signs (and 2 which are significant) we think 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.

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