Would Ta Liang Technology (TWSE:3167) Be Better Off With Less Debt?

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a 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. We can see that Ta Liang Technology Co., Ltd. (TWSE:3167) does use debt in its business. But is this debt a concern to shareholders?

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. If things get really bad, the lenders can take control of the business. 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 examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for Ta Liang Technology

What Is Ta Liang Technology's Debt?

The image below, which you can click on for greater detail, shows that Ta Liang Technology had debt of NT$1.20b at the end of March 2024, a reduction from NT$1.37b over a year. On the flip side, it has NT$627.7m in cash leading to net debt of about NT$573.5m.

A Look At Ta Liang Technology's Liabilities

We can see from the most recent balance sheet that Ta Liang Technology had liabilities of NT$1.24b falling due within a year, and liabilities of NT$837.5m due beyond that. Offsetting this, it had NT$627.7m in cash and NT$883.7m in receivables that were due within 12 months. So it has liabilities totalling NT$566.8m more than its cash and near-term receivables, combined.

Since publicly traded Ta Liang Technology shares are worth a total of NT$6.45b, it seems unlikely that this level of liabilities would be a major threat. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Ta Liang Technology will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

In the last year Ta Liang Technology had a loss before interest and tax, and actually shrunk its revenue by 24%, to NT$1.4b. That makes us nervous, to say the least.

Caveat Emptor

Not only did Ta Liang Technology's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). To be specific the EBIT loss came in at NT$71m. 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. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. Surprisingly, we note that it actually reported positive free cash flow of NT$411m and a profit of NT$20m. So if we focus on those metrics there seems to be a chance the company will manage its debt without much trouble. 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 example, we've discovered 4 warning signs for Ta Liang Technology (2 are a bit unpleasant!) that you should be aware of before investing here.

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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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.