Taiwan Television EnterpriseLtd (GTSM:8329) Has Debt But No Earnings; Should You Worry?

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' 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. As with many other companies Taiwan Television Enterprise Co.,Ltd. (GTSM:8329) 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. 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, 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.

Check out our latest analysis for Taiwan Television EnterpriseLtd

How Much Debt Does Taiwan Television EnterpriseLtd Carry?

As you can see below, Taiwan Television EnterpriseLtd had NT$150.0m of debt, at June 2020, which is about the same as the year before. You can click the chart for greater detail. However, it does have NT$412.9m in cash offsetting this, leading to net cash of NT$262.9m.

A Look At Taiwan Television EnterpriseLtd's Liabilities

We can see from the most recent balance sheet that Taiwan Television EnterpriseLtd had liabilities of NT$505.8m falling due within a year, and liabilities of NT$640.4m due beyond that. Offsetting these obligations, it had cash of NT$412.9m as well as receivables valued at NT$140.4m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by NT$592.9m.

While this might seem like a lot, it is not so bad since Taiwan Television EnterpriseLtd has a market capitalization of NT$2.11b, and so it could probably strengthen its balance sheet by raising capital if it needed to. But it's clear that we should definitely closely examine whether it can manage its debt without dilution. While it does have liabilities worth noting, Taiwan Television EnterpriseLtd also has more cash than debt, so we're pretty confident it can manage its debt safely. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Taiwan Television EnterpriseLtd'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.

Over 12 months, Taiwan Television EnterpriseLtd made a loss at the EBIT level, and saw its revenue drop to NT$1.1b, which is a fall of 10%. We would much prefer see growth.

So How Risky Is Taiwan Television EnterpriseLtd?

While Taiwan Television EnterpriseLtd lost money on an earnings before interest and tax (EBIT) level, it actually booked a paper profit of NT$81m. So taking that on face value, and considering the cash, we don't think its very risky in the near term. With revenue growth uninspiring, we'd really need to see some positive EBIT before mustering much enthusiasm for this business. 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. Consider risks, for instance. Every company has them, and we've spotted 2 warning signs for Taiwan Television EnterpriseLtd you should know about.

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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