Would Tze Shin International (TPE:2611) Be Better Off With Less Debt?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. Importantly, Tze Shin International Co. Ltd. (TPE:2611) does carry debt. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

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. 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 Tze Shin International

What Is Tze Shin International's Net Debt?

You can click the graphic below for the historical numbers, but it shows that Tze Shin International had NT$1.05b of debt in September 2020, down from NT$1.15b, one year before. On the flip side, it has NT$530.2m in cash leading to net debt of about NT$521.5m.

How Strong Is Tze Shin International's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Tze Shin International had liabilities of NT$1.10b due within 12 months and liabilities of NT$784.6m due beyond that. Offsetting this, it had NT$530.2m in cash and NT$189.0m in receivables that were due within 12 months. So it has liabilities totalling NT$1.17b more than its cash and near-term receivables, combined.

This is a mountain of leverage relative to its market capitalization of NT$1.78b. This suggests shareholders would be heavily diluted if the company needed to shore up its balance sheet in a hurry. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Tze Shin International will need earnings to service that debt. 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 Tze Shin International had a loss before interest and tax, and actually shrunk its revenue by 26%, to NT$675m. To be frank that doesn't bode well.

Caveat Emptor

While Tze Shin International's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. Its EBIT loss was a whopping NT$341m. 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. Another cause for caution is that is bled NT$53m in negative free cash flow over the last twelve months. So suffice it to say we do consider the stock to be 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. To that end, you should learn about the 3 warning signs we've spotted with Tze Shin International (including 1 which doesn't sit too well with us) .

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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