Taiflex Scientific (TPE:8039) Seems To Use Debt Rather Sparingly

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. Importantly, Taiflex Scientific Co., Ltd. (TPE:8039) does carry debt. But the more important question is: how much risk is that debt creating?

When Is Debt Dangerous?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. 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

What Is Taiflex Scientific's Net Debt?

You can click the graphic below for the historical numbers, but it shows that Taiflex Scientific had NT$714.0m of debt in December 2020, down from NT$1.67b, one year before. But on the other hand it also has NT$1.90b in cash, leading to a NT$1.19b net cash position.

How Strong Is Taiflex Scientific's Balance Sheet?

According to the last reported balance sheet, Taiflex Scientific had liabilities of NT$2.81b due within 12 months, and liabilities of NT$1.15b due beyond 12 months. Offsetting these obligations, it had cash of NT$1.90b as well as receivables valued at NT$4.24b due within 12 months. So it can boast NT$2.19b more liquid assets than total liabilities.

It's good to see that Taiflex Scientific has plenty of liquidity on its balance sheet, suggesting conservative management of liabilities. 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 41% over the last twelve months, and that growth will make it easier to handle its debt. 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 Taiflex Scientific'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.

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. During the last three years, Taiflex Scientific produced sturdy free cash flow equating to 57% of its EBIT, about what we'd expect. This free cash flow puts the company in a good position to pay down debt, when appropriate.

Summing up

While it is always sensible to investigate a company's debt, in this case Taiflex Scientific has NT$1.19b in net cash and a decent-looking balance sheet. And we liked the look of last year's 41% year-on-year EBIT growth. So we don't think Taiflex Scientific's use of debt is risky. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. Case in point: We've spotted 1 warning sign for Taiflex Scientific you should be aware of.

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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