These 4 Measures Indicate That TST Group Holding (TPE:4439) Is Using Debt Safely

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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 TST Group Holding Ltd. (TPE:4439) makes use of debt. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. 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. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

See our latest analysis for TST Group Holding

What Is TST Group Holding's Debt?

As you can see below, TST Group Holding had NT$47.3m of debt at September 2020, down from NT$409.5m a year prior. But it also has NT$1.37b in cash to offset that, meaning it has NT$1.33b net cash.

A Look At TST Group Holding's Liabilities

Zooming in on the latest balance sheet data, we can see that TST Group Holding had liabilities of NT$1.55b due within 12 months and liabilities of NT$113.5m due beyond that. Offsetting this, it had NT$1.37b in cash and NT$1.08b in receivables that were due within 12 months. So it actually has NT$793.7m more liquid assets than total liabilities.

This surplus suggests that TST Group Holding 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. Succinctly put, TST Group Holding boasts net cash, so it's fair to say it does not have a heavy debt load!

TST Group Holding's EBIT was pretty flat over the last year, but that shouldn't be an issue given the it doesn't have a lot of debt. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine TST Group Holding's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. While TST Group Holding has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. During the last three years, TST Group Holding generated free cash flow amounting to a very robust 93% of its EBIT, more than we'd expect. That positions it well to pay down debt if desirable to do so.

Summing up

While we empathize with investors who find debt concerning, you should keep in mind that TST Group Holding has net cash of NT$1.33b, as well as more liquid assets than liabilities. And it impressed us with free cash flow of NT$989m, being 93% of its EBIT. So is TST Group Holding's debt a risk? It doesn't seem so to us. 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. Consider risks, for instance. Every company has them, and we've spotted 2 warning signs for TST Group Holding you should know about.

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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