We Think Taiwan Surface Mounting Technology (TWSE:6278) Can Stay On Top Of Its Debt

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. As with many other companies Taiwan Surface Mounting Technology Corp. (TWSE:6278) makes use of debt. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. 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.

Check out our latest analysis for Taiwan Surface Mounting Technology

What Is Taiwan Surface Mounting Technology's Net Debt?

The chart below, which you can click on for greater detail, shows that Taiwan Surface Mounting Technology had NT$7.62b in debt in March 2024; about the same as the year before. But on the other hand it also has NT$18.4b in cash, leading to a NT$10.8b net cash position.

How Strong Is Taiwan Surface Mounting Technology's Balance Sheet?

We can see from the most recent balance sheet that Taiwan Surface Mounting Technology had liabilities of NT$24.2b falling due within a year, and liabilities of NT$5.73b due beyond that. Offsetting these obligations, it had cash of NT$18.4b as well as receivables valued at NT$14.6b due within 12 months. So it actually has NT$3.08b more liquid assets than total liabilities.

This surplus suggests that Taiwan Surface Mounting Technology has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Simply put, the fact that Taiwan Surface Mounting Technology has more cash than debt is arguably a good indication that it can manage its debt safely.

The modesty of its debt load may become crucial for Taiwan Surface Mounting Technology if management cannot prevent a repeat of the 38% cut to EBIT over the last year. When it comes to paying off debt, falling earnings are no more useful than sugary sodas are for your health. The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine Taiwan Surface Mounting Technology'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 Taiwan Surface Mounting 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 last three years, Taiwan Surface Mounting Technology recorded free cash flow worth a fulsome 96% of its EBIT, which is stronger than we'd usually expect. That puts it in a very strong position to pay down debt.

Summing Up

While it is always sensible to investigate a company's debt, in this case Taiwan Surface Mounting Technology has NT$10.8b in net cash and a decent-looking balance sheet. And it impressed us with free cash flow of NT$4.3b, being 96% of its EBIT. So we are not troubled with Taiwan Surface Mounting Technology's debt use. 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. We've identified 1 warning sign with Taiwan Surface Mounting Technology , and understanding them should be part of your investment process.

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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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.

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