TA-I Technology (TWSE:2478) 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.' 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. As with many other companies TA-I Technology Co., Ltd. (TWSE:2478) makes use of debt. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

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, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for TA-I Technology

What Is TA-I Technology's Net Debt?

As you can see below, at the end of March 2024, TA-I Technology had NT$1.52b of debt, up from NT$1.44b a year ago. Click the image for more detail. But on the other hand it also has NT$2.05b in cash, leading to a NT$532.4m net cash position.

A Look At TA-I Technology's Liabilities

We can see from the most recent balance sheet that TA-I Technology had liabilities of NT$2.26b falling due within a year, and liabilities of NT$609.2m due beyond that. Offsetting this, it had NT$2.05b in cash and NT$1.28b in receivables that were due within 12 months. So it can boast NT$457.5m more liquid assets than total liabilities.

This short term liquidity is a sign that TA-I Technology could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, TA-I Technology boasts net cash, so it's fair to say it does not have a heavy debt load!

But the other side of the story is that TA-I Technology saw its EBIT decline by 3.2% over the last year. If earnings continue to decline at that rate the company may have increasing difficulty managing its debt load. The balance sheet is clearly the area to focus on when you are analysing debt. But it is TA-I Technology's earnings that will influence how the balance sheet holds up in the future. 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.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While TA-I Technology 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 most recent three years, TA-I Technology recorded free cash flow worth 77% of its EBIT, which is around normal, given free cash flow excludes interest and tax. 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 TA-I Technology has NT$532.4m in net cash and a decent-looking balance sheet. And it impressed us with free cash flow of NT$562m, being 77% of its EBIT. So we don't think TA-I Technology'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. For example, we've discovered 2 warning signs for TA-I Technology (1 shouldn't be ignored!) that you should be aware of before investing here.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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.