Taiflex Scientific (TPE:8039) Could Easily Take On More Debt

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. As with many other companies Taiflex Scientific Co., Ltd. (TPE:8039) makes use of debt. But is this debt a concern to shareholders?

When Is Debt A Problem?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

Check out our latest analysis for Taiflex Scientific

How Much Debt Does Taiflex Scientific Carry?

As you can see below, Taiflex Scientific had NT$900.4m of debt at September 2020, down from NT$2.04b a year prior. However, its balance sheet shows it holds NT$2.14b in cash, so it actually has NT$1.23b net cash.

How Strong Is Taiflex Scientific's Balance Sheet?

The latest balance sheet data shows that Taiflex Scientific had liabilities of NT$2.78b due within a year, and liabilities of NT$1.14b falling due after that. On the other hand, it had cash of NT$2.14b and NT$3.80b worth of receivables due within a year. So it actually has NT$2.03b more liquid assets than total liabilities.

This surplus suggests that Taiflex Scientific is using debt in a way that is appears to be both safe and conservative. Due to its strong net asset position, it is not likely to face issues with its lenders. Succinctly put, Taiflex Scientific boasts net cash, so it's fair to say it does not have a heavy debt load!

On top of that, Taiflex Scientific grew its EBIT by 44% over the last twelve months, and that growth will make it easier to handle its debt. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Taiflex Scientific can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. While Taiflex Scientific 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 three years, Taiflex Scientific recorded free cash flow worth a fulsome 80% of its EBIT, which is stronger than we'd usually expect. That positions it well to pay down debt if desirable to do so.

Summing up

While it is always sensible to investigate a company's debt, in this case Taiflex Scientific has NT$1.23b in net cash and a decent-looking balance sheet. And it impressed us with free cash flow of NT$1.4b, being 80% of its EBIT. The bottom line is that we do not find Taiflex Scientific's debt levels at all concerning. 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. For instance, we've identified 1 warning sign for Taiflex Scientific that you should be aware of.

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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