Is Taiwan Union Technology (GTSM:6274) Using Too Much 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.' 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 Union Technology Corporation (GTSM:6274) does carry debt. But is this debt a concern to shareholders?

Why Does Debt Bring Risk?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for Taiwan Union Technology

How Much Debt Does Taiwan Union Technology Carry?

You can click the graphic below for the historical numbers, but it shows that as of September 2020 Taiwan Union Technology had NT$4.03b of debt, an increase on NT$2.08b, over one year. But it also has NT$6.50b in cash to offset that, meaning it has NT$2.47b net cash.

How Strong Is Taiwan Union Technology's Balance Sheet?

According to the last reported balance sheet, Taiwan Union Technology had liabilities of NT$5.34b due within 12 months, and liabilities of NT$3.62b due beyond 12 months. On the other hand, it had cash of NT$6.50b and NT$5.48b worth of receivables due within a year. So it actually has NT$3.01b more liquid assets than total liabilities.

This short term liquidity is a sign that Taiwan Union Technology could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, Taiwan Union Technology boasts net cash, so it's fair to say it does not have a heavy debt load!

The good news is that Taiwan Union Technology has increased its EBIT by 3.3% over twelve months, which should ease any concerns about debt repayment. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Taiwan Union Technology can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. While Taiwan Union Technology has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. In the last three years, Taiwan Union Technology's free cash flow amounted to 42% of its EBIT, less than we'd expect. That weak cash conversion makes it more difficult to handle indebtedness.

Summing up

While we empathize with investors who find debt concerning, you should keep in mind that Taiwan Union Technology has net cash of NT$2.47b, as well as more liquid assets than liabilities. On top of that, it increased its EBIT by 3.3% in the last twelve months. So we are not troubled with Taiwan Union Technology's debt use. 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. Be aware that Taiwan Union Technology is showing 2 warning signs in our investment analysis , you should know about...

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

When trading Taiwan Union Technology 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 (at) simplywallst.com.