TaiDoc Technology (GTSM:4736) Seems To Use Debt Rather Sparingly

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.' 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 can see that TaiDoc Technology Corporation (GTSM:4736) does use debt in its business. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

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. 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.

View our latest analysis for TaiDoc Technology

How Much Debt Does TaiDoc Technology Carry?

You can click the graphic below for the historical numbers, but it shows that TaiDoc Technology had NT$954.5m of debt in September 2020, down from NT$2.24b, one year before. But it also has NT$2.21b in cash to offset that, meaning it has NT$1.26b net cash.

A Look At TaiDoc Technology's Liabilities

The latest balance sheet data shows that TaiDoc Technology had liabilities of NT$1.62b due within a year, and liabilities of NT$848.3m falling due after that. Offsetting these obligations, it had cash of NT$2.21b as well as receivables valued at NT$1.15b due within 12 months. So it can boast NT$892.1m more liquid assets than total liabilities.

This short term liquidity is a sign that TaiDoc Technology could probably pay off its debt with ease, as its balance sheet is far from stretched. Simply put, the fact that TaiDoc Technology has more cash than debt is arguably a good indication that it can manage its debt safely.

Even more impressive was the fact that TaiDoc Technology grew its EBIT by 132% over twelve months. If maintained that growth will make the debt even more manageable in the years ahead. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if TaiDoc Technology can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While TaiDoc Technology 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. Looking at the most recent three years, TaiDoc Technology recorded free cash flow of 43% of its EBIT, which is weaker 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 TaiDoc Technology has NT$1.26b in net cash and a decent-looking balance sheet. And it impressed us with its EBIT growth of 132% over the last year. So we don't think TaiDoc Technology'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 TaiDoc Technology (1 doesn't sit too well with us!) that you should be aware of before investing here.

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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