Tainan Enterprises (TWSE:1473) Could Easily Take On More 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. As with many other companies Tainan Enterprises Co., Ltd. (TWSE:1473) makes use of debt. But is this debt a concern to shareholders?

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. If things get really bad, the lenders can take control of the business. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

View our latest analysis for Tainan Enterprises

What Is Tainan Enterprises's Net Debt?

The image below, which you can click on for greater detail, shows that Tainan Enterprises had debt of NT$573.2m at the end of September 2023, a reduction from NT$853.0m over a year. However, it does have NT$1.13b in cash offsetting this, leading to net cash of NT$554.3m.

A Look At Tainan Enterprises' Liabilities

Zooming in on the latest balance sheet data, we can see that Tainan Enterprises had liabilities of NT$1.41b due within 12 months and liabilities of NT$220.2m due beyond that. Offsetting this, it had NT$1.13b in cash and NT$1.30b in receivables that were due within 12 months. So it can boast NT$806.4m more liquid assets than total liabilities.

This surplus suggests that Tainan Enterprises is using debt in a way that is appears to be both safe and conservative. Due to its strong net asset position, it is not likely to face issues with its lenders. Succinctly put, Tainan Enterprises boasts net cash, so it's fair to say it does not have a heavy debt load!

Better yet, Tainan Enterprises grew its EBIT by 105% last year, which is an impressive improvement. If maintained that growth will make the debt even more manageable in the years ahead. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Tainan Enterprises 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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. While Tainan Enterprises 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. Over the last two years, Tainan Enterprises actually produced more free cash flow than EBIT. That sort of strong cash generation warms our hearts like a puppy in a bumblebee suit.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Tainan Enterprises has net cash of NT$554.3m, as well as more liquid assets than liabilities. The cherry on top was that in converted 155% of that EBIT to free cash flow, bringing in NT$617m. When it comes to Tainan Enterprises's debt, we sufficiently relaxed that our mind turns to the jacuzzi. 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. These risks can be hard to spot. Every company has them, and we've spotted 1 warning sign for Tainan Enterprises 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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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.