Is Tah Tong Textile (TPE:1441) Using Debt Sensibly?

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' 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. We note that Tah Tong Textile Co., Ltd. (TPE:1441) does have debt on its balance sheet. But is this debt a concern to shareholders?

Why Does Debt Bring Risk?

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. 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.

Check out our latest analysis for Tah Tong Textile

What Is Tah Tong Textile's Net Debt?

The chart below, which you can click on for greater detail, shows that Tah Tong Textile had NT$1.20b in debt in September 2020; about the same as the year before. However, because it has a cash reserve of NT$117.6m, its net debt is less, at about NT$1.08b.

A Look At Tah Tong Textile's Liabilities

Zooming in on the latest balance sheet data, we can see that Tah Tong Textile had liabilities of NT$1.35b due within 12 months and liabilities of NT$231.7m due beyond that. Offsetting these obligations, it had cash of NT$117.6m as well as receivables valued at NT$101.3m due within 12 months. So its liabilities total NT$1.37b more than the combination of its cash and short-term receivables.

This deficit casts a shadow over the NT$790.3m company, like a colossus towering over mere mortals. So we definitely think shareholders need to watch this one closely. After all, Tah Tong Textile would likely require a major re-capitalisation if it had to pay its creditors today. When analysing debt levels, the balance sheet is the obvious place to start. But it is Tah Tong Textile'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.

Over 12 months, Tah Tong Textile saw its revenue hold pretty steady, and it did not report positive earnings before interest and tax. While that hardly impresses, its not too bad either.

Caveat Emptor

Over the last twelve months Tah Tong Textile produced an earnings before interest and tax (EBIT) loss. Its EBIT loss was a whopping NT$269m. Considering that alongside the liabilities mentioned above make us nervous about the company. We'd want to see some strong near-term improvements before getting too interested in the stock. Not least because it burned through NT$58m in negative free cash flow over the last year. So suffice it to say we consider the stock to be risky. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. For example - Tah Tong Textile has 1 warning sign we think you should be aware of.

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. 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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