Taiwan-Asia Semiconductor (TWSE:2340) Is Carrying A Fair Bit Of Debt

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. As with many other companies Taiwan-Asia Semiconductor Corporation (TWSE:2340) makes use of debt. But the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. 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. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

View our latest analysis for Taiwan-Asia Semiconductor

What Is Taiwan-Asia Semiconductor's Net Debt?

As you can see below, at the end of September 2024, Taiwan-Asia Semiconductor had NT$4.35b of debt, up from NT$1.55b a year ago. Click the image for more detail. However, it does have NT$2.51b in cash offsetting this, leading to net debt of about NT$1.84b.

How Healthy Is Taiwan-Asia Semiconductor's Balance Sheet?

We can see from the most recent balance sheet that Taiwan-Asia Semiconductor had liabilities of NT$2.95b falling due within a year, and liabilities of NT$3.49b due beyond that. On the other hand, it had cash of NT$2.51b and NT$1.39b worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by NT$2.54b.

This deficit isn't so bad because Taiwan-Asia Semiconductor is worth NT$11.1b, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. However, it is still worthwhile taking a close look at its ability to pay off debt. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Taiwan-Asia Semiconductor will need earnings to service that debt. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

Over 12 months, Taiwan-Asia Semiconductor reported revenue of NT$4.2b, which is a gain of 9.7%, although it did not report any earnings before interest and tax. That rate of growth is a bit slow for our taste, but it takes all types to make a world.

Caveat Emptor

Over the last twelve months Taiwan-Asia Semiconductor produced an earnings before interest and tax (EBIT) loss. To be specific the EBIT loss came in at NT$342m. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. However, it doesn't help that it burned through NT$2.6b of cash over the last year. So in short it's a really risky stock. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. Case in point: We've spotted 2 warning signs for Taiwan-Asia Semiconductor you should be aware of.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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