Is Tainergy Tech (TPE:4934) Using Debt Sensibly?

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.' 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 can see that Tainergy Tech Co., Ltd. (TPE:4934) does use debt in its business. But should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. 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. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

See our latest analysis for Tainergy Tech

What Is Tainergy Tech's Net Debt?

The image below, which you can click on for greater detail, shows that Tainergy Tech had debt of NT$536.3m at the end of December 2020, a reduction from NT$1.40b over a year. But on the other hand it also has NT$792.5m in cash, leading to a NT$256.2m net cash position.

How Strong Is Tainergy Tech's Balance Sheet?

The latest balance sheet data shows that Tainergy Tech had liabilities of NT$1.55b due within a year, and liabilities of NT$610.5m falling due after that. Offsetting these obligations, it had cash of NT$792.5m as well as receivables valued at NT$365.1m due within 12 months. So its liabilities total NT$1.01b more than the combination of its cash and short-term receivables.

Since publicly traded Tainergy Tech shares are worth a total of NT$5.44b, it seems unlikely that this level of liabilities would be a major threat. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. Despite its noteworthy liabilities, Tainergy Tech boasts net cash, so it's fair to say it does not have a heavy debt load! 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 Tainergy Tech 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.

Over 12 months, Tainergy Tech made a loss at the EBIT level, and saw its revenue drop to NT$2.2b, which is a fall of 5.8%. That's not what we would hope to see.

So How Risky Is Tainergy Tech?

Although Tainergy Tech had an earnings before interest and tax (EBIT) loss over the last twelve months, it made a statutory profit of NT$2.9m. 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. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. To that end, you should be aware of the 1 warning sign we've spotted with Tainergy Tech .

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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