Tai Roun ProductsLtd (TWSE:1220) Could Easily Take On More Debt

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. We note that Tai Roun Products Co.,Ltd. (TWSE:1220) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

When Is Debt Dangerous?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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, plenty of companies use debt to fund growth, without any negative consequences. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

View our latest analysis for Tai Roun ProductsLtd

What Is Tai Roun ProductsLtd's Debt?

The chart below, which you can click on for greater detail, shows that Tai Roun ProductsLtd had NT$245.2m in debt in September 2024; about the same as the year before. But on the other hand it also has NT$573.8m in cash, leading to a NT$328.6m net cash position.

How Healthy Is Tai Roun ProductsLtd's Balance Sheet?

We can see from the most recent balance sheet that Tai Roun ProductsLtd had liabilities of NT$481.7m falling due within a year, and liabilities of NT$185.5m due beyond that. Offsetting these obligations, it had cash of NT$573.8m as well as receivables valued at NT$694.0m due within 12 months. So it can boast NT$600.6m more liquid assets than total liabilities.

It's good to see that Tai Roun ProductsLtd has plenty of liquidity on its balance sheet, suggesting conservative management of liabilities. Due to its strong net asset position, it is not likely to face issues with its lenders. Succinctly put, Tai Roun ProductsLtd boasts net cash, so it's fair to say it does not have a heavy debt load!

Even more impressive was the fact that Tai Roun ProductsLtd grew its EBIT by 248% over twelve months. That boost will make it even easier to pay down debt going forward. 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 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. Tai Roun ProductsLtd 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. During the last three years, Tai Roun ProductsLtd produced sturdy free cash flow equating to 79% of its EBIT, about what we'd expect. 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 Tai Roun ProductsLtd has net cash of NT$328.6m, as well as more liquid assets than liabilities. And we liked the look of last year's 248% year-on-year EBIT growth. When it comes to Tai Roun ProductsLtd's debt, we sufficiently relaxed that our mind turns to the jacuzzi. 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. For example, we've discovered 3 warning signs for Tai Roun ProductsLtd (1 is a bit unpleasant!) that you should be aware of before investing here.

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. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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.