Health Check: How Prudently Does Tecom (TPE:2321) Use Debt?

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. Importantly, Tecom Co., Ltd. (TPE:2321) does carry debt. But is this debt a concern to shareholders?

When Is Debt A Problem?

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 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, debt can be an important tool in businesses, particularly capital heavy businesses. 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 Tecom

What Is Tecom's 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, it also had NT$607.2m in cash, and so its net debt is NT$316.6m.

How Strong Is Tecom's Balance Sheet?

The latest balance sheet data shows that Tecom had liabilities of NT$901.3m due within a year, and liabilities of NT$577.8m falling due after that. Offsetting these obligations, it had cash of NT$607.2m as well as receivables valued at NT$204.4m 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$273.9m 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. When analysing debt levels, the balance sheet is the obvious place to start. But it is Tecom's earnings that will influence how the balance sheet holds up in the future. 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.

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

Not only did Tecom's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). 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. For example, we would not want to see a repeat of last year's loss of NT$65m. 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. Case in point: We've spotted 3 warning signs for Tecom you should be aware of, and 2 of them don't sit too well with us.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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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