Is Tigerair Taiwan (TWSE:6757) Using Too Much Debt?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. We note that Tigerair Taiwan Co., Ltd. (TWSE:6757) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

Check out our latest analysis for Tigerair Taiwan

What Is Tigerair Taiwan's Debt?

As you can see below, Tigerair Taiwan had NT$283.6m of debt at June 2024, down from NT$2.10b a year prior. But on the other hand it also has NT$8.47b in cash, leading to a NT$8.19b net cash position.

How Strong Is Tigerair Taiwan's Balance Sheet?

We can see from the most recent balance sheet that Tigerair Taiwan had liabilities of NT$6.84b falling due within a year, and liabilities of NT$7.43b due beyond that. Offsetting these obligations, it had cash of NT$8.47b as well as receivables valued at NT$414.0m due within 12 months. So it has liabilities totalling NT$5.39b more than its cash and near-term receivables, combined.

Since publicly traded Tigerair Taiwan shares are worth a total of NT$27.6b, 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. While it does have liabilities worth noting, Tigerair Taiwan also has more cash than debt, so we're pretty confident it can manage its debt safely.

Although Tigerair Taiwan made a loss at the EBIT level, last year, it was also good to see that it generated NT$3.4b in EBIT over the last twelve months. The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since Tigerair Taiwan 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.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. Tigerair Taiwan 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. Happily for any shareholders, Tigerair Taiwan actually produced more free cash flow than EBIT over the last year. That sort of strong cash conversion gets us as excited as the crowd when the beat drops at a Daft Punk concert.

Summing Up

Although Tigerair Taiwan's balance sheet isn't particularly strong, due to the total liabilities, it is clearly positive to see that it has net cash of NT$8.19b. The cherry on top was that in converted 157% of that EBIT to free cash flow, bringing in NT$5.3b. So is Tigerair Taiwan's debt a risk? It doesn't seem so to us. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. To that end, you should be aware of the 1 warning sign we've spotted with Tigerair Taiwan .

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.