Would Tainan EnterprisesLtd (TPE:1473) Be Better Off With Less Debt?

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. We note that Tainan Enterprises Co.,Ltd (TPE:1473) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

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. 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.

Check out our latest analysis for Tainan EnterprisesLtd

What Is Tainan EnterprisesLtd's Debt?

The image below, which you can click on for greater detail, shows that at September 2020 Tainan EnterprisesLtd had debt of NT$1.07b, up from NT$946.5m in one year. However, it also had NT$1.07b in cash, and so its net debt is NT$3.95m.

A Look At Tainan EnterprisesLtd's Liabilities

Zooming in on the latest balance sheet data, we can see that Tainan EnterprisesLtd had liabilities of NT$1.81b due within 12 months and liabilities of NT$235.1m due beyond that. On the other hand, it had cash of NT$1.07b and NT$1.55b worth of receivables due within a year. So it actually has NT$574.8m more liquid assets than total liabilities.

This surplus suggests that Tainan EnterprisesLtd is using debt in a way that is appears to be both safe and conservative. Because it has plenty of assets, it is unlikely to have trouble with its lenders. But either way, Tainan EnterprisesLtd has virtually no net debt, so it's fair to say it does not have a heavy debt load! When analysing debt levels, the balance sheet is the obvious place to start. But it is Tainan EnterprisesLtd'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 EnterprisesLtd had a loss before interest and tax, and actually shrunk its revenue by 18%, to NT$6.3b. That's not what we would hope to see.

Caveat Emptor

Not only did Tainan EnterprisesLtd's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). Indeed, it lost NT$211m at the EBIT level. Looking on the brighter side, the business has adequate liquid assets, which give it time to grow and develop before its debt becomes a near-term issue. Still, we'd be more encouraged to study the business in depth if it already had some free cash flow. This one is a bit too risky for our liking. 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, we've discovered 3 warning signs for Tainan EnterprisesLtd (1 shouldn't be ignored!) that you should be aware of before investing here.

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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