Does TRK (TPE:1432) 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. We note that TRK Corporation (TPE:1432) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

What Risk Does Debt Bring?

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. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for TRK

What Is TRK's Net Debt?

As you can see below, TRK had NT$312.9m of debt, at September 2020, which is about the same as the year before. You can click the chart for greater detail. However, it does have NT$641.7m in cash offsetting this, leading to net cash of NT$328.8m.

A Look At TRK's Liabilities

The latest balance sheet data shows that TRK had liabilities of NT$902.6m due within a year, and liabilities of NT$3.11b falling due after that. Offsetting this, it had NT$641.7m in cash and NT$162.4m in receivables that were due within 12 months. So it has liabilities totalling NT$3.21b more than its cash and near-term receivables, combined.

This deficit casts a shadow over the NT$1.09b company, like a colossus towering over mere mortals. So we'd watch its balance sheet closely, without a doubt. At the end of the day, TRK would probably need a major re-capitalization if its creditors were to demand repayment. TRK boasts net cash, so it's fair to say it does not have a heavy debt load, even if it does have very significant liabilities, in total. The balance sheet is clearly the area to focus on when you are analysing debt. But it is TRK'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.

In the last year TRK wasn't profitable at an EBIT level, but managed to grow its revenue by 3.3%, to NT$1.2b. That rate of growth is a bit slow for our taste, but it takes all types to make a world.

So How Risky Is TRK?

While TRK lost money on an earnings before interest and tax (EBIT) level, it actually generated positive free cash flow NT$256m. So although it is loss-making, it doesn't seem to have too much near-term balance sheet risk, keeping in mind the net cash. Given the lack of transparency around future revenue (and cashflow), we're nervous about this one, until it makes its first big sales. To us, it is a high risk play. 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. Be aware that TRK is showing 2 warning signs in our investment analysis , and 1 of those makes us a bit uncomfortable...

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. 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.
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