Taiwan Taffeta Fabric (TPE:1454) Has Debt But No Earnings; Should You Worry?

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. As with many other companies Taiwan Taffeta Fabric Co., Ltd. (TPE:1454) makes use of debt. But the more important question is: how much risk is that debt creating?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for Taiwan Taffeta Fabric

How Much Debt Does Taiwan Taffeta Fabric Carry?

The image below, which you can click on for greater detail, shows that Taiwan Taffeta Fabric had debt of NT$165.0m at the end of September 2020, a reduction from NT$230.0m over a year. However, its balance sheet shows it holds NT$370.3m in cash, so it actually has NT$205.3m net cash.

A Look At Taiwan Taffeta Fabric's Liabilities

We can see from the most recent balance sheet that Taiwan Taffeta Fabric had liabilities of NT$293.9m falling due within a year, and liabilities of NT$64.9m due beyond that. On the other hand, it had cash of NT$370.3m and NT$90.1m worth of receivables due within a year. So it actually has NT$101.6m more liquid assets than total liabilities.

This short term liquidity is a sign that Taiwan Taffeta Fabric could probably pay off its debt with ease, as its balance sheet is far from stretched. Simply put, the fact that Taiwan Taffeta Fabric has more cash than debt is arguably a good indication that it can manage its debt safely. There's no doubt that we learn most about debt from the balance sheet. But it is Taiwan Taffeta Fabric'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 Taiwan Taffeta Fabric had a loss before interest and tax, and actually shrunk its revenue by 32%, to NT$1.3b. That makes us nervous, to say the least.

So How Risky Is Taiwan Taffeta Fabric?

Although Taiwan Taffeta Fabric had an earnings before interest and tax (EBIT) loss over the last twelve months, it generated positive free cash flow of NT$149m. So although it is loss-making, it doesn't seem to have too much near-term balance sheet risk, keeping in mind the net cash. With mediocre revenue growth in the last year, we're don't find the investment opportunity particularly compelling. 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 3 warning signs for Taiwan Taffeta Fabric you should be aware of, and 1 of them is a bit concerning.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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