Is Taiwan Taffeta Fabric (TWSE:1454) Weighed On By Its Debt Load?

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. We note that Taiwan Taffeta Fabric Co., Ltd. (TWSE:1454) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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.

View our latest analysis for Taiwan Taffeta Fabric

How Much Debt Does Taiwan Taffeta Fabric Carry?

You can click the graphic below for the historical numbers, but it shows that Taiwan Taffeta Fabric had NT$170.0m of debt in March 2024, down from NT$220.0m, one year before. But it also has NT$444.6m in cash to offset that, meaning it has NT$274.6m net cash.

A Look At Taiwan Taffeta Fabric's Liabilities

According to the last reported balance sheet, Taiwan Taffeta Fabric had liabilities of NT$370.6m due within 12 months, and liabilities of NT$37.9m due beyond 12 months. On the other hand, it had cash of NT$444.6m and NT$157.9m worth of receivables due within a year. So it actually has NT$194.0m 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. Succinctly put, Taiwan Taffeta Fabric boasts net cash, 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 you can't view debt in total isolation; since Taiwan Taffeta Fabric will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Over 12 months, Taiwan Taffeta Fabric made a loss at the EBIT level, and saw its revenue drop to NT$1.5b, which is a fall of 10.0%. That's not what we would hope to see.

So How Risky Is Taiwan Taffeta Fabric?

While Taiwan Taffeta Fabric lost money on an earnings before interest and tax (EBIT) level, it actually booked a paper profit of NT$42m. So taking that on face value, and considering the cash, we don't think its very risky in the near term. With mediocre revenue growth in the last year, we're don't find the investment opportunity particularly compelling. 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. For instance, we've identified 2 warning signs for Taiwan Taffeta Fabric that you should be aware of.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com