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

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.' 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. We can see that Tainergy Tech Co., Ltd. (TWSE:4934) does use debt in its business. But is this debt a concern to shareholders?

When Is Debt A Problem?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. 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 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?

You can click the graphic below for the historical numbers, but it shows that as of March 2024 Tainergy Tech had NT$335.6m of debt, an increase on NT$198.3m, over one year. However, it does have NT$875.8m in cash offsetting this, leading to net cash of NT$540.2m.

How Strong Is Tainergy Tech's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Tainergy Tech had liabilities of NT$573.4m due within 12 months and liabilities of NT$204.0m due beyond that. On the other hand, it had cash of NT$875.8m and NT$442.9m worth of receivables due within a year. So it can boast NT$541.3m more liquid assets than total liabilities.

This short term liquidity is a sign that Tainergy Tech could probably pay off its debt with ease, as its balance sheet is far from stretched. Simply put, the fact that Tainergy Tech has more cash than debt is arguably a good indication that it can manage its debt safely. There's no doubt that we learn most about debt from the balance sheet. 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.

In the last year Tainergy Tech had a loss before interest and tax, and actually shrunk its revenue by 37%, to NT$1.6b. That makes us nervous, to say the least.

So How Risky Is Tainergy Tech?

Although Tainergy Tech had an earnings before interest and tax (EBIT) loss over the last twelve months, it generated positive free cash flow of NT$217m. 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. We'll feel more comfortable with the stock once EBIT is positive, given the lacklustre revenue growth. For riskier companies like Tainergy Tech I always like to keep an eye on the long term profit and revenue trends. Fortunately, you can click to see our interactive graph of its profit, revenue, and operating cashflow.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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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