Taiyen Biotech (TPE:1737) Seems To Use Debt Quite Sensibly

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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. 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?

Debt assists a business until the business has trouble paying it off, either with new capital or with free 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. 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.

See our latest analysis for Taiyen Biotech

How Much Debt Does Taiyen Biotech Carry?

You can click the graphic below for the historical numbers, but it shows that as of September 2020 Taiyen Biotech had NT$62.7m of debt, an increase on NT$20.0m, over one year. However, it does have NT$1.88b in cash offsetting this, leading to net cash of NT$1.81b.

A Look At Taiyen Biotech's Liabilities

We can see from the most recent balance sheet that Taiyen Biotech had liabilities of NT$536.5m falling due within a year, and liabilities of NT$759.6m due beyond that. Offsetting these obligations, it had cash of NT$1.88b as well as receivables valued at NT$393.0m due within 12 months. So it actually has NT$973.3m more liquid assets than total liabilities.

This surplus suggests that Taiyen Biotech has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, Taiyen Biotech boasts net cash, so it's fair to say it does not have a heavy debt load!

While Taiyen Biotech doesn't seem to have gained much on the EBIT line, at least earnings remain stable for now. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Taiyen Biotech'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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. 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 22% of its EBIT, less than we'd expect. That's not great, when it comes to paying down debt.

Summing up

While it is always sensible to investigate a company's debt, in this case Taiyen Biotech has NT$1.81b in net cash and a decent-looking balance sheet. So we are not troubled with Taiyen Biotech's debt use. 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. Consider for instance, the ever-present spectre of investment risk. We've identified 1 warning sign with Taiyen Biotech , and understanding them should be part of your investment process.

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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