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.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. We can see that Taitien Electronics Co., Ltd. (GTSM:8289) does use debt in its business. But should shareholders be worried about its use of debt?
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. If things get really bad, the lenders can take control of the business. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. 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. When we examine debt levels, we first consider both cash and debt levels, together.
How Much Debt Does Taitien Electronics Carry?
The chart below, which you can click on for greater detail, shows that Taitien Electronics had NT$262.6m in debt in September 2020; about the same as the year before. But it also has NT$532.9m in cash to offset that, meaning it has NT$270.3m net cash.
A Look At Taitien Electronics' Liabilities
We can see from the most recent balance sheet that Taitien Electronics had liabilities of NT$545.2m falling due within a year, and liabilities of NT$169.1m due beyond that. On the other hand, it had cash of NT$532.9m and NT$437.0m worth of receivables due within a year. So it can boast NT$255.5m more liquid assets than total liabilities.
This excess liquidity is a great indication that Taitien Electronics' balance sheet is almost as strong as Fort Knox. Having regard to this fact, we think its balance sheet is as strong as an ox. Succinctly put, Taitien Electronics boasts net cash, so it's fair to say it does not have a heavy debt load! When analysing debt levels, the balance sheet is the obvious place to start. But it is Taitien Electronics'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, Taitien Electronics saw its revenue hold pretty steady, and it did not report positive earnings before interest and tax. While that hardly impresses, its not too bad either.
So How Risky Is Taitien Electronics?
While Taitien Electronics lost money on an earnings before interest and tax (EBIT) level, it actually generated positive free cash flow NT$9.3m. 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 mediocre revenue growth in the last year, we're don't find the investment opportunity particularly compelling. 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. We've identified 2 warning signs with Taitien Electronics (at least 1 which is a bit concerning) , and understanding them should be part of your investment process.
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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