Does Taiwan FamilyMart (GTSM:5903) Have A Healthy Balance Sheet?

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. We note that Taiwan FamilyMart Co., Ltd. (GTSM:5903) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

Check out our latest analysis for Taiwan FamilyMart

How Much Debt Does Taiwan FamilyMart Carry?

The image below, which you can click on for greater detail, shows that Taiwan FamilyMart had debt of NT$1.83b at the end of December 2020, a reduction from NT$2.35b over a year. However, its balance sheet shows it holds NT$10.8b in cash, so it actually has NT$8.96b net cash.

A Look At Taiwan FamilyMart's Liabilities

Zooming in on the latest balance sheet data, we can see that Taiwan FamilyMart had liabilities of NT$30.4b due within 12 months and liabilities of NT$24.0b due beyond that. Offsetting this, it had NT$10.8b in cash and NT$2.35b in receivables that were due within 12 months. So it has liabilities totalling NT$41.4b more than its cash and near-term receivables, combined.

This is a mountain of leverage relative to its market capitalization of NT$58.9b. Should its lenders demand that it shore up the balance sheet, shareholders would likely face severe dilution. Despite its noteworthy liabilities, Taiwan FamilyMart boasts net cash, so it's fair to say it does not have a heavy debt load!

And we also note warmly that Taiwan FamilyMart grew its EBIT by 17% last year, making its debt load easier to handle. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Taiwan FamilyMart's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. Taiwan FamilyMart may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. Happily for any shareholders, Taiwan FamilyMart actually produced more free cash flow than EBIT over the last three years. That sort of strong cash generation warms our hearts like a puppy in a bumblebee suit.

Summing up

Although Taiwan FamilyMart's balance sheet isn't particularly strong, due to the total liabilities, it is clearly positive to see that it has net cash of NT$8.96b. And it impressed us with free cash flow of NT$7.6b, being 233% of its EBIT. So we don't have any problem with Taiwan FamilyMart's use of debt. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. Be aware that Taiwan FamilyMart is showing 1 warning sign in our investment analysis , you should know about...

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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