Tainan Spinning (TPE:1440) Is Making Moderate Use Of Debt

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. As with many other companies Tainan Spinning Co., Ltd. (TPE:1440) makes use of debt. But the more important question is: how much risk is that debt creating?

When Is Debt Dangerous?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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 examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for Tainan Spinning

How Much Debt Does Tainan Spinning Carry?

The image below, which you can click on for greater detail, shows that at September 2020 Tainan Spinning had debt of NT$14.7b, up from NT$12.0b in one year. However, because it has a cash reserve of NT$5.30b, its net debt is less, at about NT$9.40b.

A Look At Tainan Spinning's Liabilities

The latest balance sheet data shows that Tainan Spinning had liabilities of NT$10.3b due within a year, and liabilities of NT$11.4b falling due after that. Offsetting these obligations, it had cash of NT$5.30b as well as receivables valued at NT$1.87b due within 12 months. So its liabilities total NT$14.5b more than the combination of its cash and short-term receivables.

This deficit isn't so bad because Tainan Spinning is worth NT$24.8b, 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 you can't view debt in total isolation; since Tainan Spinning will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

In the last year Tainan Spinning had a loss before interest and tax, and actually shrunk its revenue by 22%, to NT$18b. That makes us nervous, to say the least.

Caveat Emptor

While Tainan Spinning's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. To be specific the EBIT loss came in at NT$570m. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. So we think its balance sheet is a little strained, though not beyond repair. However, it doesn't help that it burned through NT$341m of cash over the last year. So to be blunt we think it is risky. 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. For instance, we've identified 4 warning signs for Tainan Spinning (2 don't sit too well with us) you should be aware of.

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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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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