Tai Roun ProductsLtd (TPE:1220) Could Easily Take On More 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. Importantly, Tai Roun Products Co.,Ltd. (TPE:1220) does carry debt. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. If things get really bad, the lenders can take control of the business. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for Tai Roun ProductsLtd

What Is Tai Roun ProductsLtd's Net Debt?

You can click the graphic below for the historical numbers, but it shows that Tai Roun ProductsLtd had NT$111.9m of debt in September 2020, down from NT$228.2m, one year before. However, it does have NT$458.2m in cash offsetting this, leading to net cash of NT$346.3m.

A Look At Tai Roun ProductsLtd's Liabilities

Zooming in on the latest balance sheet data, we can see that Tai Roun ProductsLtd had liabilities of NT$266.4m due within 12 months and liabilities of NT$192.7m due beyond that. On the other hand, it had cash of NT$458.2m and NT$743.3m worth of receivables due within a year. So it can boast NT$742.4m more liquid assets than total liabilities.

This surplus strongly suggests that Tai Roun ProductsLtd has a rock-solid balance sheet (and the debt is of no concern whatsoever). On this view, lenders should feel as safe as the beloved of a black-belt karate master. Simply put, the fact that Tai Roun ProductsLtd has more cash than debt is arguably a good indication that it can manage its debt safely.

On top of that, Tai Roun ProductsLtd grew its EBIT by 42% over the last twelve months, and that growth will make it easier to handle its debt. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Tai Roun ProductsLtd 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.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While Tai Roun ProductsLtd 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 most recent three years, Tai Roun ProductsLtd recorded free cash flow worth 56% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This free cash flow puts the company in a good position to pay down debt, when appropriate.

Summing up

While we empathize with investors who find debt concerning, you should keep in mind that Tai Roun ProductsLtd has net cash of NT$346.3m, as well as more liquid assets than liabilities. And it impressed us with its EBIT growth of 42% over the last year. So we don't think Tai Roun ProductsLtd's use of debt is risky. 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 example, we've discovered 3 warning signs for Tai Roun ProductsLtd (1 doesn't sit too well with us!) that you should be aware of before investing here.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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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