Is Taiwan Styrene Monomer (TWSE:1310) A Risky Investment?

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.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. As with many other companies Taiwan Styrene Monomer Corporation (TWSE:1310) makes use of debt. But should shareholders be worried about its use of debt?

When Is Debt Dangerous?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. If things get really bad, the lenders can take control of the business. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for Taiwan Styrene Monomer

How Much Debt Does Taiwan Styrene Monomer Carry?

As you can see below, Taiwan Styrene Monomer had NT$1.20b of debt, at September 2024, which is about the same as the year before. You can click the chart for greater detail. However, it does have NT$802.9m in cash offsetting this, leading to net debt of about NT$393.8m.

How Strong Is Taiwan Styrene Monomer's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Taiwan Styrene Monomer had liabilities of NT$2.05b due within 12 months and liabilities of NT$267.8m due beyond that. Offsetting these obligations, it had cash of NT$802.9m as well as receivables valued at NT$1.05b due within 12 months. So it has liabilities totalling NT$458.7m more than its cash and near-term receivables, combined.

Of course, Taiwan Styrene Monomer has a market capitalization of NT$5.27b, so these liabilities are probably manageable. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. There's no doubt that we learn most about debt from the balance sheet. But it is Taiwan Styrene Monomer's earnings that will influence how the balance sheet holds up in the future. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

In the last year Taiwan Styrene Monomer wasn't profitable at an EBIT level, but managed to grow its revenue by 20%, to NT$11b. With any luck the company will be able to grow its way to profitability.

Caveat Emptor

Despite the top line growth, Taiwan Styrene Monomer still had an earnings before interest and tax (EBIT) loss over the last year. Its EBIT loss was a whopping NT$574m. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. So we think its balance sheet is a little strained, though not beyond repair. However, it doesn't help that it burned through NT$392m of cash over the last year. So suffice it to say we consider the stock very 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 example, we've discovered 1 warning sign for Taiwan Styrene Monomer that you should be aware of before investing here.

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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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.