Is Tainergy Tech (TPE:4934) Using Too Much Debt?

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. Importantly, Tainergy Tech Co., Ltd. (TPE:4934) 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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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, 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 step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for Tainergy Tech

What Is Tainergy Tech's Debt?

As you can see below, Tainergy Tech had NT$692.4m of debt at September 2020, down from NT$1.46b a year prior. But it also has NT$773.3m in cash to offset that, meaning it has NT$80.9m net cash.

How Healthy Is Tainergy Tech's Balance Sheet?

The latest balance sheet data shows that Tainergy Tech had liabilities of NT$1.23b due within a year, and liabilities of NT$527.5m falling due after that. Offsetting this, it had NT$773.3m in cash and NT$313.7m in receivables that were due within 12 months. So it has liabilities totalling NT$671.5m more than its cash and near-term receivables, combined.

Of course, Tainergy Tech has a market capitalization of NT$5.62b, so these liabilities are probably manageable. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. While it does have liabilities worth noting, Tainergy Tech also has more cash than debt, so we're pretty confident it can manage its debt safely. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Tainergy Tech'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.

Over 12 months, Tainergy Tech made a loss at the EBIT level, and saw its revenue drop to NT$2.1b, which is a fall of 8.9%. We would much prefer see growth.

So How Risky Is Tainergy Tech?

While Tainergy Tech lost money on an earnings before interest and tax (EBIT) level, it actually generated positive free cash flow NT$189m. 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. With revenue growth uninspiring, we'd really need to see some positive EBIT before mustering much enthusiasm for this business. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. Consider for instance, the ever-present spectre of investment risk. We've identified 1 warning sign with Tainergy Tech , and understanding them should be part of your investment process.

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.

When trading Tainergy Tech or any other investment, use the platform considered by many to be the Professional's Gateway to the Worlds Market, Interactive Brokers. You get the lowest-cost* trading on stocks, options, futures, forex, bonds and funds worldwide from a single integrated account. Promoted

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.
^*Interactive Brokers Rated Lowest Cost Broker by StockBrokers.com Annual Online Review 2020

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com.