Health Check: How Prudently Does Tai Twun Enterprise (TPE:3432) Use Debt?

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that '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 Tai Twun Enterprise Co., Ltd. (TPE:3432) does have debt on its balance sheet. 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 common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. 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. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for Tai Twun Enterprise

What Is Tai Twun Enterprise's Debt?

The image below, which you can click on for greater detail, shows that Tai Twun Enterprise had debt of NT$97.4m at the end of September 2020, a reduction from NT$288.1m over a year. However, it does have NT$1.66b in cash offsetting this, leading to net cash of NT$1.56b.

How Healthy Is Tai Twun Enterprise's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Tai Twun Enterprise had liabilities of NT$120.9m due within 12 months and liabilities of NT$133.5m due beyond that. Offsetting this, it had NT$1.66b in cash and NT$8.20m in receivables that were due within 12 months. So it actually has NT$1.41b more liquid assets than total liabilities.

This surplus strongly suggests that Tai Twun Enterprise has a rock-solid balance sheet (and the debt is of no concern whatsoever). Having regard to this fact, we think its balance sheet is as strong as an ox. Succinctly put, Tai Twun Enterprise boasts net cash, so it's fair to say it does not have a heavy debt load! The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since Tai Twun Enterprise 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.

In the last year Tai Twun Enterprise had a loss before interest and tax, and actually shrunk its revenue by 51%, to NT$33m. That makes us nervous, to say the least.

So How Risky Is Tai Twun Enterprise?

Although Tai Twun Enterprise had an earnings before interest and tax (EBIT) loss over the last twelve months, it made a statutory profit of NT$24m. So when you consider it has net cash, along with the statutory profit, the stock probably isn't as risky as it might seem, at least in the short term. There's no doubt the next few years will be crucial to how the business matures. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. Consider for instance, the ever-present spectre of investment risk. We've identified 4 warning signs with Tai Twun Enterprise , and understanding them should be part of your investment process.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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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