Is TA-I Technology (TPE:2478) Using Too Much Debt?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. As with many other companies TA-I Technology Co., Ltd. (TPE:2478) makes use of debt. But is this debt a concern to shareholders?

Why Does Debt Bring Risk?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for TA-I Technology

What Is TA-I Technology's Net Debt?

As you can see below, at the end of September 2020, TA-I Technology had NT$1.50b of debt, up from NT$600.0m a year ago. Click the image for more detail. But on the other hand it also has NT$1.64b in cash, leading to a NT$140.0m net cash position.

How Strong Is TA-I Technology's Balance Sheet?

According to the last reported balance sheet, TA-I Technology had liabilities of NT$2.63b due within 12 months, and liabilities of NT$476.0m due beyond 12 months. Offsetting these obligations, it had cash of NT$1.64b as well as receivables valued at NT$1.93b due within 12 months. So it actually has NT$465.2m more liquid assets than total liabilities.

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

On the other hand, TA-I Technology's EBIT dived 18%, over the last year. We think hat kind of performance, if repeated frequently, could well lead to difficulties for the stock. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since TA-I Technology will need earnings to service that debt. 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.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While TA-I 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. Looking at the most recent three years, TA-I Technology recorded free cash flow of 47% of its EBIT, which is weaker than we'd expect. That weak cash conversion makes it more difficult to handle indebtedness.

Summing up

While it is always sensible to investigate a company's debt, in this case TA-I Technology has NT$140.0m in net cash and a decent-looking balance sheet. So we don't have any problem with TA-I Technology's use of debt. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. Consider risks, for instance. Every company has them, and we've spotted 1 warning sign for TA-I Technology you should know about.

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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