Is Tai Tung Communication (TPE:8011) Using Debt In A Risky Way?

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. Importantly, Tai Tung Communication Co., Ltd. (TPE:8011) does carry debt. But the real question is whether this debt is making the company risky.

What Risk Does Debt Bring?

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, plenty of companies use debt to fund growth, without any negative consequences. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for Tai Tung Communication

How Much Debt Does Tai Tung Communication Carry?

The chart below, which you can click on for greater detail, shows that Tai Tung Communication had NT$2.61b in debt in September 2020; about the same as the year before. However, it also had NT$289.8m in cash, and so its net debt is NT$2.32b.

How Healthy Is Tai Tung Communication's Balance Sheet?

According to the last reported balance sheet, Tai Tung Communication had liabilities of NT$1.04b due within 12 months, and liabilities of NT$2.14b due beyond 12 months. Offsetting this, it had NT$289.8m in cash and NT$220.7m in receivables that were due within 12 months. So it has liabilities totalling NT$2.68b more than its cash and near-term receivables, combined.

This deficit is considerable relative to its market capitalization of NT$2.82b, so it does suggest shareholders should keep an eye on Tai Tung Communication's use of debt. This suggests shareholders would be heavily diluted if the company needed to shore up its balance sheet in a hurry. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine Tai Tung Communication'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.

In the last year Tai Tung Communication had a loss before interest and tax, and actually shrunk its revenue by 2.1%, to NT$1.5b. We would much prefer see growth.

Caveat Emptor

Over the last twelve months Tai Tung Communication produced an earnings before interest and tax (EBIT) loss. Indeed, it lost NT$4.1m at the EBIT level. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. So we think its balance sheet is a little strained, though not beyond repair. Surprisingly, we note that it actually reported positive free cash flow of NT$96m and a profit of NT$6.8m. So if we focus on those metrics there seems to be a chance the company will manage its debt without much trouble. 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 3 warning signs for Tai Tung Communication you should be aware of, and 1 of them is concerning.

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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