These 4 Measures Indicate That Tai Roun ProductsLtd (TPE:1220) Is Using Debt Safely

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that '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. Importantly, Tai Roun Products Co.,Ltd. (TPE:1220) does carry debt. But should shareholders be worried about its use of debt?

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. If things get really bad, the lenders can take control of the business. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest 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.

See our latest analysis for Tai Roun ProductsLtd

What Is Tai Roun ProductsLtd's Net Debt?

As you can see below, Tai Roun ProductsLtd had NT$111.9m of debt at September 2020, down from NT$228.2m a year prior. But it also has NT$458.2m in cash to offset that, meaning it has NT$346.3m net cash.

How Healthy Is Tai Roun ProductsLtd's Balance Sheet?

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). With this in mind one could posit that its balance sheet means the company is able to handle some adversity. 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.

In addition to that, we're happy to report that Tai Roun ProductsLtd has boosted its EBIT by 42%, thus reducing the spectre of future debt repayments. When analysing debt levels, the balance sheet is the obvious place to start. But it is Tai Roun ProductsLtd's earnings that will influence how the balance sheet holds up in the future. 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, a company can only pay off debt with cold hard cash, not accounting profits. 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. During the last three years, Tai Roun ProductsLtd produced sturdy free cash flow equating to 56% of its EBIT, about what we'd expect. 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 we liked the look of last year's 42% year-on-year EBIT growth. So is Tai Roun ProductsLtd's debt a risk? It doesn't seem so to us. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. Case in point: We've spotted 3 warning signs for Tai Roun ProductsLtd you should be aware of, and 1 of them is a bit unpleasant.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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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