Is Twinhead International (TPE:2364) Weighed On By Its Debt Load?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. We note that Twinhead International Corp. (TPE:2364) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. 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. 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.

See our latest analysis for Twinhead International

What Is Twinhead International's Net Debt?

As you can see below, Twinhead International had NT$627.0m of debt, at September 2020, which is about the same as the year before. You can click the chart for greater detail. However, it also had NT$224.1m in cash, and so its net debt is NT$402.9m.

How Strong Is Twinhead International's Balance Sheet?

According to the last reported balance sheet, Twinhead International had liabilities of NT$856.4m due within 12 months, and liabilities of NT$59.1m due beyond 12 months. Offsetting these obligations, it had cash of NT$224.1m as well as receivables valued at NT$59.2m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by NT$632.2m.

This deficit is considerable relative to its market capitalization of NT$672.0m, so it does suggest shareholders should keep an eye on Twinhead International's use of debt. This suggests shareholders would be heavily diluted if the company needed to shore up its balance sheet in a hurry. There's no doubt that we learn most about debt from the balance sheet. But it is Twinhead International'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 Twinhead International wasn't profitable at an EBIT level, but managed to grow its revenue by 9.7%, to NT$866m. That rate of growth is a bit slow for our taste, but it takes all types to make a world.

Caveat Emptor

Importantly, Twinhead International had an earnings before interest and tax (EBIT) loss over the last year. Indeed, it lost NT$1.2m at the EBIT level. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. So we think its balance sheet is a little strained, though not beyond repair. Surprisingly, we note that it actually reported positive free cash flow of NT$75m and a profit of NT$5.2m. So if we focus on those metrics there seems to be a chance the company will manage its debt without much trouble. 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. Case in point: We've spotted 3 warning signs for Twinhead International you should be aware of, and 1 of them shouldn't be ignored.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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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