Does Taiwan TaxiLtd (GTSM:2640) Have A Healthy Balance Sheet?

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.' 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. We note that Taiwan Taxi Co.,Ltd. (GTSM:2640) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

When Is Debt A Problem?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. 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, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for Taiwan TaxiLtd

What Is Taiwan TaxiLtd's Net Debt?

As you can see below, Taiwan TaxiLtd had NT$262.5m of debt at September 2020, down from NT$423.9m a year prior. However, it does have NT$479.9m in cash offsetting this, leading to net cash of NT$217.4m.

How Healthy Is Taiwan TaxiLtd's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Taiwan TaxiLtd had liabilities of NT$700.1m due within 12 months and liabilities of NT$312.5m due beyond that. Offsetting these obligations, it had cash of NT$479.9m as well as receivables valued at NT$225.8m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by NT$306.9m.

Of course, Taiwan TaxiLtd has a market capitalization of NT$4.40b, so these liabilities are probably manageable. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. While it does have liabilities worth noting, Taiwan TaxiLtd also has more cash than debt, so we're pretty confident it can manage its debt safely.

The good news is that Taiwan TaxiLtd has increased its EBIT by 9.6% over twelve months, which should ease any concerns about debt repayment. There's no doubt that we learn most about debt from the balance sheet. But it is Taiwan TaxiLtd'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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. While Taiwan TaxiLtd 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 TaxiLtd recorded free cash flow worth a fulsome 86% of its EBIT, which is stronger than we'd usually expect. That positions it well to pay down debt if desirable to do so.

Summing up

While it is always sensible to look at a company's total liabilities, it is very reassuring that Taiwan TaxiLtd has NT$217.4m in net cash. And it impressed us with free cash flow of NT$370m, being 86% of its EBIT. So we don't think Taiwan TaxiLtd's use of debt is risky. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. For instance, we've identified 1 warning sign for Taiwan TaxiLtd that 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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This article by Simply Wall St is general in nature. 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.
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