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

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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 Dafeng TV Ltd. (TPE:6184) makes use of debt. But the more important question is: how much risk is that debt creating?

What Risk Does Debt Bring?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth 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 Dafeng TV

What Is Dafeng TV's Debt?

You can click the graphic below for the historical numbers, but it shows that Dafeng TV had NT$2.19b of debt in September 2020, down from NT$2.71b, one year before. However, its balance sheet shows it holds NT$2.32b in cash, so it actually has NT$129.9m net cash.

A Look At Dafeng TV's Liabilities

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. On the other hand, it had cash of NT$2.32b and NT$88.0m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by NT$789.6m.

Since publicly traded Dafeng TV shares are worth a total of NT$6.31b, it seems unlikely that this level of liabilities would be a major threat. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. 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 it is Dafeng TV'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. 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. Over the last three years, Dafeng TV actually produced more free cash flow than EBIT. That sort of strong cash conversion gets us as excited as the crowd when the beat drops at a Daft Punk concert.

Summing up

Although Dafeng TV's balance sheet isn't particularly strong, due to the total liabilities, it is clearly positive to see that it 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 is Dafeng TV's debt a risk? It doesn't seem so to us. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. For example - Dafeng TV has 2 warning signs we think 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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