Taiwan Land Development (TPE:2841) Has Debt But No Earnings; Should You Worry?

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a 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. Importantly, Taiwan Land Development Corporation (TPE:2841) does carry debt. But the real question is whether this debt is making the company risky.

When Is Debt A Problem?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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, plenty of companies use debt to fund growth, without any negative consequences. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for Taiwan Land Development

How Much Debt Does Taiwan Land Development Carry?

The chart below, which you can click on for greater detail, shows that Taiwan Land Development had NT$14.4b in debt in September 2020; about the same as the year before. Net debt is about the same, since the it doesn't have much cash.

How Strong Is Taiwan Land Development's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Taiwan Land Development had liabilities of NT$11.5b due within 12 months and liabilities of NT$6.90b due beyond that. Offsetting these obligations, it had cash of NT$171.4m as well as receivables valued at NT$6.48b due within 12 months. So its liabilities total NT$11.7b more than the combination of its cash and short-term receivables.

This deficit casts a shadow over the NT$5.68b company, like a colossus towering over mere mortals. So we definitely think shareholders need to watch this one closely. At the end of the day, Taiwan Land Development would probably need a major re-capitalization if its creditors were to demand repayment. 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 Taiwan Land Development will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

In the last year Taiwan Land Development had a loss before interest and tax, and actually shrunk its revenue by 5.6%, to NT$352m. We would much prefer see growth.

Caveat Emptor

Importantly, Taiwan Land Development had an earnings before interest and tax (EBIT) loss over the last year. Indeed, it lost a very considerable NT$596m at the EBIT level. When we look at that alongside the significant liabilities, we're not particularly confident about the company. It would need to improve its operations quickly for us to be interested in it. Not least because it burned through NT$1.2b in negative free cash flow over the last year. So suffice it to say we consider the stock to be risky. 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. Take risks, for example - Taiwan Land Development has 2 warning signs we think you should be aware of.

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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