Dafeng TV (TPE:6184) Seems To Use Debt Rather Sparingly

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.' 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. We note that Dafeng TV Ltd. (TPE:6184) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

When Is Debt Dangerous?

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. 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 thing to do when considering how much debt a business uses is to look at its cash and debt together.

View our latest analysis for Dafeng TV

How Much Debt Does Dafeng TV Carry?

The image below, which you can click on for greater detail, shows that Dafeng TV had debt of NT$2.19b at the end of September 2020, a reduction from NT$2.71b over a year. However, it does have NT$2.32b in cash offsetting this, leading to net cash of NT$129.9m.

How Strong Is Dafeng TV's Balance Sheet?

According to the last reported balance sheet, Dafeng TV had liabilities of NT$1.15b due within 12 months, and liabilities of NT$2.05b due beyond 12 months. Offsetting this, it had NT$2.32b in cash and NT$88.0m in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by NT$789.6m.

Of course, Dafeng TV has a market capitalization of NT$6.38b, so these liabilities are probably manageable. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. Despite its noteworthy liabilities, Dafeng TV boasts net cash, so it's fair to say it does not have a heavy debt load!

And we also note warmly that Dafeng TV grew its EBIT by 12% last year, making its debt load easier to handle. The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since Dafeng TV will need earnings to service that debt. 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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. While Dafeng TV 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, Dafeng TV actually produced more free cash flow than EBIT over the last three years. There's nothing better than incoming cash when it comes to staying in your lenders' good graces.

Summing up

While Dafeng TV does have more liabilities than liquid assets, it also has net cash of NT$129.9m. The cherry on top was that in converted 116% of that EBIT to free cash flow, bringing in NT$846m. So we don't think Dafeng TV's use of debt is risky. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. Case in point: We've spotted 2 warning signs for Dafeng TV you should be aware of.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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