Is TaiSol Electronics (TPE:3338) A Risky Investment?

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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 TaiSol Electronics Co., Ltd. (TPE:3338) makes use of 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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. 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.

Check out our latest analysis for TaiSol Electronics

What Is TaiSol Electronics's Net Debt?

As you can see below, TaiSol Electronics had NT$460.0m of debt, at December 2020, which is about the same as the year before. You can click the chart for greater detail. But it also has NT$667.0m in cash to offset that, meaning it has NT$207.0m net cash.

How Healthy Is TaiSol Electronics' Balance Sheet?

Zooming in on the latest balance sheet data, we can see that TaiSol Electronics had liabilities of NT$2.30b due within 12 months and liabilities of NT$396.5m due beyond that. Offsetting these obligations, it had cash of NT$667.0m as well as receivables valued at NT$2.20b due within 12 months. So it actually has NT$165.9m more liquid assets than total liabilities.

This short term liquidity is a sign that TaiSol Electronics could probably pay off its debt with ease, as its balance sheet is far from stretched. Simply put, the fact that TaiSol Electronics has more cash than debt is arguably a good indication that it can manage its debt safely.

On the other hand, TaiSol Electronics's EBIT dived 17%, 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 future earnings, more than anything, that will determine TaiSol Electronics's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. TaiSol Electronics 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. In the last three years, TaiSol Electronics's free cash flow amounted to 22% of its EBIT, less 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 TaiSol Electronics has NT$207.0m in net cash and a decent-looking balance sheet. So we don't have any problem with TaiSol Electronics's use of debt. 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 2 warning signs for TaiSol Electronics you should be aware of.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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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