Taiyen Biotech (TPE:1737) Has A Pretty Healthy Balance Sheet

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 Taiyen Biotech Co., Ltd. (TPE:1737) 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?

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 usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for Taiyen Biotech

What Is Taiyen Biotech's Net Debt?

As you can see below, Taiyen Biotech had NT$91.7m of debt at December 2020, down from NT$103.6m a year prior. However, its balance sheet shows it holds NT$1.89b in cash, so it actually has NT$1.80b net cash.

A Look At Taiyen Biotech's Liabilities

According to the last reported balance sheet, Taiyen Biotech had liabilities of NT$694.9m due within 12 months, and liabilities of NT$738.6m due beyond 12 months. Offsetting this, it had NT$1.89b in cash and NT$574.8m in receivables that were due within 12 months. So it can boast NT$1.03b more liquid assets than total liabilities.

This short term liquidity is a sign that Taiyen Biotech could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, Taiyen Biotech boasts net cash, so it's fair to say it does not have a heavy debt load!

And we also note warmly that Taiyen Biotech grew its EBIT by 10% last year, making its debt load easier to handle. The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since Taiyen Biotech will need earnings to service that debt. 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. Taiyen Biotech 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. In the last three years, Taiyen Biotech's free cash flow amounted to 21% of its EBIT, less than we'd expect. That weak cash conversion makes it more difficult to handle indebtedness.

Summing up

While it is always sensible to investigate a company's debt, in this case Taiyen Biotech has NT$1.80b in net cash and a decent-looking balance sheet. And it also grew its EBIT by 10% over the last year. So we are not troubled with Taiyen Biotech's debt use. The balance sheet is clearly the area to focus on when you are analysing debt. 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 Taiyen Biotech you should know about.

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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