Health Check: How Prudently Does Tecom (TPE:2321) Use 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 Tecom Co., Ltd. (TPE:2321) makes use of debt. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. 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. 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.

Check out our latest analysis for Tecom

What Is Tecom's Net Debt?

You can click the graphic below for the historical numbers, but it shows that Tecom had NT$923.8m of debt in September 2020, down from NT$1.01b, one year before. However, because it has a cash reserve of NT$607.2m, its net debt is less, at about NT$316.6m.

How Healthy Is Tecom's Balance Sheet?

We can see from the most recent balance sheet that Tecom had liabilities of NT$901.3m falling due within a year, and liabilities of NT$577.8m due beyond that. Offsetting this, it had NT$607.2m in cash and NT$204.4m in receivables that were due within 12 months. So its liabilities total NT$667.5m more than the combination of its cash and short-term receivables.

This deficit casts a shadow over the NT$342.4m company, like a colossus towering over mere mortals. So we definitely think shareholders need to watch this one closely. After all, Tecom would likely require a major re-capitalisation if it had to pay its creditors today. The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since Tecom 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 Tecom had a loss before interest and tax, and actually shrunk its revenue by 32%, to NT$1.2b. That makes us nervous, to say the least.

Caveat Emptor

While Tecom's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. Indeed, it lost a very considerable NT$95m at the EBIT level. Considering that alongside the liabilities mentioned above make us nervous about the company. It would need to improve its operations quickly for us to be interested in it. It's fair to say the loss of NT$65m didn't encourage us either; we'd like to see a profit. And until that time we think this is a risky stock. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. Like risks, for instance. Every company has them, and we've spotted 3 warning signs for Tecom (of which 1 makes us a bit uncomfortable!) you should know about.

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. 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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