Ta Liang Technology (TWSE:3167) Is Making Moderate Use Of Debt

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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 Ta Liang Technology Co., Ltd. (TWSE:3167) makes use of debt. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

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. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for Ta Liang Technology

What Is Ta Liang Technology's Debt?

You can click the graphic below for the historical numbers, but it shows that Ta Liang Technology had NT$1.20b of debt in June 2024, down from NT$1.27b, one year before. However, it also had NT$523.4m in cash, and so its net debt is NT$671.9m.

How Strong Is Ta Liang Technology's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Ta Liang Technology had liabilities of NT$1.63b due within 12 months and liabilities of NT$828.3m due beyond that. Offsetting these obligations, it had cash of NT$523.4m as well as receivables valued at NT$1.02b due within 12 months. So it has liabilities totalling NT$921.8m more than its cash and near-term receivables, combined.

Since publicly traded Ta Liang Technology shares are worth a total of NT$11.5b, it seems unlikely that this level of liabilities would be a major threat. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. When analysing debt levels, the balance sheet is the obvious place to start. But it is Ta Liang 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.

In the last year Ta Liang Technology wasn't profitable at an EBIT level, but managed to grow its revenue by 16%, to NT$1.7b. We usually like to see faster growth from unprofitable companies, but each to their own.

Caveat Emptor

Importantly, Ta Liang Technology had an earnings before interest and tax (EBIT) loss over the last year. Indeed, it lost NT$41m at the EBIT level. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. So we think its balance sheet is a little strained, though not beyond repair. On the bright side, we note that trailing twelve month EBIT is worse than the free cash flow of NT$84m and the profit of NT$40m. So one might argue that there's still a chance it can get things on the right track. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. Be aware that Ta Liang Technology is showing 4 warning signs in our investment analysis , and 2 of those shouldn't be ignored...

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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.