Is Taiwan TaxiLtd (GTSM:2640) Using Too Much 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. We can see that Taiwan Taxi Co.,Ltd. (GTSM:2640) does use debt in its business. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

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. 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, 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. The first thing to do when considering how much debt a business uses is to look at its cash and debt 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, its balance sheet shows it holds NT$479.9m in cash, so it actually has NT$217.4m net cash.

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 this, it had NT$479.9m in cash and NT$225.8m in receivables that were due within 12 months. So it has liabilities totalling NT$306.9m more than its cash and near-term receivables, combined.

Given Taiwan TaxiLtd has a market capitalization of NT$4.48b, it's hard to believe these liabilities pose much threat. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. Despite its noteworthy liabilities, Taiwan TaxiLtd boasts net cash, so it's fair to say it does not have a heavy debt load!

Fortunately, Taiwan TaxiLtd grew its EBIT by 9.6% in the last year, making that debt load look even more manageable. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Taiwan TaxiLtd's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. Taiwan TaxiLtd may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. During the last three years, Taiwan TaxiLtd generated free cash flow amounting to a very robust 86% of its EBIT, more than we'd expect. That puts it in a very strong position to pay down debt.

Summing up

We could understand if investors are concerned about Taiwan TaxiLtd's liabilities, but we can be reassured by the fact it has has net cash of NT$217.4m. 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. 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 TaxiLtd , and understanding them should be part of your investment process.

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. 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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