Is TPK Holding (TPE:3673) Using Too Much Debt?

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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. Importantly, TPK Holding Co., Ltd. (TPE:3673) does carry debt. But the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

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 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 TPK Holding

What Is TPK Holding's Net Debt?

The image below, which you can click on for greater detail, shows that TPK Holding had debt of NT$18.3b at the end of December 2020, a reduction from NT$19.7b over a year. But on the other hand it also has NT$29.4b in cash, leading to a NT$11.0b net cash position.

A Look At TPK Holding's Liabilities

The latest balance sheet data shows that TPK Holding had liabilities of NT$29.0b due within a year, and liabilities of NT$17.8b falling due after that. On the other hand, it had cash of NT$29.4b and NT$15.0b worth of receivables due within a year. So it has liabilities totalling NT$2.45b more than its cash and near-term receivables, combined.

Given TPK Holding has a market capitalization of NT$20.1b, it's hard to believe these liabilities pose much threat. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. While it does have liabilities worth noting, TPK Holding also has more cash than debt, so we're pretty confident it can manage its debt safely.

The good news is that TPK Holding has increased its EBIT by 2.4% over twelve months, which should ease any concerns about debt repayment. 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 TPK Holding's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. While TPK Holding 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. Over the last two years, TPK Holding actually produced more free cash flow than EBIT. That sort of strong cash generation warms our hearts like a puppy in a bumblebee suit.

Summing up

While TPK Holding does have more liabilities than liquid assets, it also has net cash of NT$11.0b. The cherry on top was that in converted 437% of that EBIT to free cash flow, bringing in NT$4.9b. So we don't think TPK Holding's use of debt is risky. 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. For example TPK Holding has 4 warning signs (and 1 which is potentially serious) we think you should know about.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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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