Is Tehmag Foods (GTSM:1264) Using Too Much Debt?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. We note that Tehmag Foods Corporation (GTSM:1264) does have debt on its balance sheet. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for Tehmag Foods

How Much Debt Does Tehmag Foods Carry?

You can click the graphic below for the historical numbers, but it shows that as of December 2020 Tehmag Foods had NT$240.1m of debt, an increase on NT$1.0k, over one year. But it also has NT$972.3m in cash to offset that, meaning it has NT$732.2m net cash.

How Strong Is Tehmag Foods' Balance Sheet?

According to the last reported balance sheet, Tehmag Foods had liabilities of NT$781.8m due within 12 months, and liabilities of NT$79.2m due beyond 12 months. Offsetting this, it had NT$972.3m in cash and NT$859.1m in receivables that were due within 12 months. So it can boast NT$970.4m more liquid assets than total liabilities.

This surplus suggests that Tehmag Foods has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Simply put, the fact that Tehmag Foods has more cash than debt is arguably a good indication that it can manage its debt safely.

And we also note warmly that Tehmag Foods grew its EBIT by 12% last year, making its debt load easier to handle. There's no doubt that we learn most about debt from the balance sheet. But it is Tehmag Foods's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. Tehmag Foods 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. Over the most recent three years, Tehmag Foods recorded free cash flow worth 74% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This cold hard cash means it can reduce its debt when it wants to.

Summing up

While we empathize with investors who find debt concerning, you should keep in mind that Tehmag Foods has net cash of NT$732.2m, as well as more liquid assets than liabilities. The cherry on top was that in converted 74% of that EBIT to free cash flow, bringing in NT$580m. So we don't think Tehmag Foods's use of debt is risky. 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. For example, we've discovered 1 warning sign for Tehmag Foods that you should be aware of before investing here.

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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