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. As with many other companies Taisun Int'l (Holding) Corporation (TPE:8480) makes use of debt. But the real question is whether this debt is making the company risky.
When Is Debt Dangerous?
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. If things get really bad, the lenders can take control of the business. 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, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. When we think about a company's use of debt, we first look at cash and debt together.
What Is Taisun Int'l (Holding)'s Debt?
You can click the graphic below for the historical numbers, but it shows that as of December 2020 Taisun Int'l (Holding) had NT$989.3m of debt, an increase on NT$604.3m, over one year. However, its balance sheet shows it holds NT$1.89b in cash, so it actually has NT$899.6m net cash.
How Strong Is Taisun Int'l (Holding)'s Balance Sheet?
Zooming in on the latest balance sheet data, we can see that Taisun Int'l (Holding) had liabilities of NT$1.20b due within 12 months and liabilities of NT$2.78m due beyond that. Offsetting these obligations, it had cash of NT$1.89b as well as receivables valued at NT$107.6m due within 12 months. So it can boast NT$793.4m more liquid assets than total liabilities.
This surplus suggests that Taisun Int'l (Holding) is using debt in a way that is appears to be both safe and conservative. Because it has plenty of assets, it is unlikely to have trouble with its lenders. Simply put, the fact that Taisun Int'l (Holding) has more cash than debt is arguably a good indication that it can manage its debt safely.
And we also note warmly that Taisun Int'l (Holding) grew its EBIT by 13% last year, making its debt load easier to handle. There's no doubt that we learn most about debt from the balance sheet. But it is Taisun Int'l (Holding)'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.
Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. Taisun Int'l (Holding) 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, Taisun Int'l (Holding) produced sturdy free cash flow equating to 61% of its EBIT, about what we'd expect. This free cash flow puts the company in a good position to pay down debt, when appropriate.
While we empathize with investors who find debt concerning, you should keep in mind that Taisun Int'l (Holding) has net cash of NT$899.6m, as well as more liquid assets than liabilities. So we don't think Taisun Int'l (Holding)'s use of debt is risky. 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 instance, we've identified 2 warning signs for Taisun Int'l (Holding) that you should be aware of.
If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.
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