TA-I Technology (TPE:2478) Seems To Use Debt Quite Sensibly

Warren Buffett famously said, '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. Importantly, TA-I Technology Co., Ltd. (TPE:2478) does carry debt. But is this debt a concern to shareholders?

When Is Debt Dangerous?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. 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 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 it also has NT$1.64b in cash to offset that, meaning it has NT$140.0m net cash.

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

The latest balance sheet data shows that TA-I Technology had liabilities of NT$2.63b due within a year, and liabilities of NT$476.0m falling due after that. Offsetting this, it had NT$1.64b in cash and NT$1.93b in receivables that were due within 12 months. So it can boast 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. If that rate of decline in earnings continues, the company could find itself in a tight spot. The balance sheet is clearly the area to focus on when you are analysing debt. But it is TA-I Technology'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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. TA-I Technology may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. 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's not great, when it comes to paying down debt.

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 are not troubled with TA-I Technology's debt use. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. For instance, we've identified 1 warning sign for TA-I Technology that you should be aware of.

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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