Does Taita Chemical Company (TPE:1309) Have A Healthy Balance Sheet?

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.' 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 Taita Chemical Company, Ltd. (TPE:1309) makes use of debt. But the real question is whether this debt is making the company risky.

When Is Debt A Problem?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for Taita Chemical Company

What Is Taita Chemical Company's Net Debt?

The image below, which you can click on for greater detail, shows that Taita Chemical Company had debt of NT$1.47b at the end of September 2020, a reduction from NT$2.59b over a year. But on the other hand it also has NT$2.85b in cash, leading to a NT$1.38b net cash position.

A Look At Taita Chemical Company's Liabilities

We can see from the most recent balance sheet that Taita Chemical Company had liabilities of NT$2.25b falling due within a year, and liabilities of NT$946.8m due beyond that. Offsetting this, it had NT$2.85b in cash and NT$1.73b in receivables that were due within 12 months. So it actually has NT$1.38b more liquid assets than total liabilities.

This surplus suggests that Taita Chemical Company has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Simply put, the fact that Taita Chemical Company has more cash than debt is arguably a good indication that it can manage its debt safely.

Even more impressive was the fact that Taita Chemical Company grew its EBIT by 771% over twelve months. That boost will make it even easier to pay down debt going forward. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if Taita Chemical Company can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. While Taita Chemical Company 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. Happily for any shareholders, Taita Chemical Company actually produced more free cash flow than EBIT over the last three years. That sort of strong cash generation warms our hearts like a puppy in a bumblebee suit.

Summing up

While we empathize with investors who find debt concerning, you should keep in mind that Taita Chemical Company has net cash of NT$1.38b, as well as more liquid assets than liabilities. The cherry on top was that in converted 115% of that EBIT to free cash flow, bringing in NT$2.0b. So we don't think Taita Chemical Company's use of debt is risky. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. Be aware that Taita Chemical Company is showing 2 warning signs in our investment analysis , and 1 of those doesn't sit too well with us...

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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