Is Tatung (TPE:2371) Using Too Much Debt?

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that '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 Tatung Co., Ltd. (TPE:2371) does have debt on its balance sheet. 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 frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for Tatung

What Is Tatung's Debt?

You can click the graphic below for the historical numbers, but it shows that Tatung had NT$43.8b of debt in September 2020, down from NT$49.8b, one year before. However, because it has a cash reserve of NT$12.4b, its net debt is less, at about NT$31.4b.

A Look At Tatung's Liabilities

Zooming in on the latest balance sheet data, we can see that Tatung had liabilities of NT$47.5b due within 12 months and liabilities of NT$35.7b due beyond that. Offsetting this, it had NT$12.4b in cash and NT$6.93b in receivables that were due within 12 months. So its liabilities total NT$63.9b more than the combination of its cash and short-term receivables.

When you consider that this deficiency exceeds the company's NT$50.1b market capitalization, you might well be inclined to review the balance sheet intently. In the scenario where the company had to clean up its balance sheet quickly, it seems likely shareholders would suffer extensive dilution. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Tatung will need earnings to service that debt. 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 Tatung had a loss before interest and tax, and actually shrunk its revenue by 5.1%, to NT$35b. We would much prefer see growth.

Caveat Emptor

Over the last twelve months Tatung produced an earnings before interest and tax (EBIT) loss. To be specific the EBIT loss came in at NT$38m. Considering that alongside the liabilities mentioned above make us nervous about the company. It would need to improve its operations quickly for us to be interested in it. On the bright side, we note that trailing twelve month EBIT is worse than the free cash flow of NT$2.0b and the profit of NT$1.9b. 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. Be aware that Tatung is showing 3 warning signs in our investment analysis , and 1 of those is a bit unpleasant...

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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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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