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

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.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. We can see that TaiDoc Technology Corporation (GTSM:4736) does use debt in its business. But is this debt a concern to shareholders?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for TaiDoc Technology

What Is TaiDoc Technology's Debt?

You can click the graphic below for the historical numbers, but it shows that TaiDoc Technology had NT$897.5m of debt in December 2020, down from NT$2.33b, one year before. However, it does have NT$2.24b in cash offsetting this, leading to net cash of NT$1.35b.

A Look At TaiDoc Technology's Liabilities

We can see from the most recent balance sheet that TaiDoc Technology had liabilities of NT$1.74b falling due within a year, and liabilities of NT$809.3m due beyond that. On the other hand, it had cash of NT$2.24b and NT$1.07b worth of receivables due within a year. So it can boast NT$764.2m more liquid assets than total liabilities.

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

Better yet, TaiDoc Technology grew its EBIT by 146% last year, which is an impressive improvement. 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 it is future earnings, more than anything, that will determine TaiDoc Technology's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs 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. In the last three years, TaiDoc Technology's free cash flow amounted to 41% of its EBIT, less than we'd expect. That weak cash conversion makes it more difficult to handle indebtedness.

Summing up

While we empathize with investors who find debt concerning, you should keep in mind that TaiDoc Technology has net cash of NT$1.35b, as well as more liquid assets than liabilities. And we liked the look of last year's 146% year-on-year EBIT growth. So we don't think TaiDoc Technology's use of debt is risky. 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. Case in point: We've spotted 2 warning signs for TaiDoc Technology you should be aware of, and 1 of them is a bit unpleasant.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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