David Iben put it well when he said, ‘Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.’ 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. As with many other companies Taisun Enterprise Co., Ltd. (TPE:1218) makes use of debt. But is this debt a concern to shareholders?
When Is Debt Dangerous?
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. Ultimately, if the company can’t fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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 think about a company’s use of debt, we first look at cash and debt together.
How Much Debt Does Taisun Enterprise Carry?
The image below, which you can click on for greater detail, shows that Taisun Enterprise had debt of NT$721.2m at the end of September 2020, a reduction from NT$1.50b over a year. However, it also had NT$716.7m in cash, and so its net debt is NT$4.49m.
How Strong Is Taisun Enterprise’s Balance Sheet?
According to the last reported balance sheet, Taisun Enterprise had liabilities of NT$2.01b due within 12 months, and liabilities of NT$231.3m due beyond 12 months. Offsetting this, it had NT$716.7m in cash and NT$1.44b in receivables that were due within 12 months. So its liabilities total NT$82.1m more than the combination of its cash and short-term receivables.
Having regard to Taisun Enterprise’s size, it seems that its liquid assets are well balanced with its total liabilities. So it’s very unlikely that the NT$13.8b company is short on cash, but still worth keeping an eye on the balance sheet. Carrying virtually no net debt, Taisun Enterprise has a very light debt load indeed.
We use two main ratios to inform us about debt levels relative to earnings. The first is net debt divided by earnings before interest, tax, depreciation, and amortization (EBITDA), while the second is how many times its earnings before interest and tax (EBIT) covers its interest expense (or its interest cover, for short). The advantage of this approach is that we take into account both the absolute quantum of debt (with net debt to EBITDA) and the actual interest expenses associated with that debt (with its interest cover ratio).
Taisun Enterprise has barely any net debt, as demonstrated by its net debt to EBITDA ratio of only 0.012. Humorously, it actually received more in interest over the last twelve months than it had to pay. So there’s no doubt this company can take on debt as easily as enthusiastic spray-tanners take on an orange hue. Better yet, Taisun Enterprise grew its EBIT by 114% last year, which is an impressive improvement. If maintained that growth will make the debt even more manageable in the years ahead. There’s no doubt that we learn most about debt from the balance sheet. But you can’t view debt in total isolation; since Taisun Enterprise 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.
But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. So the logical step is to look at the proportion of that EBIT that is matched by actual free cash flow. Over the last three years, Taisun Enterprise actually produced more free cash flow than EBIT. That sort of strong cash conversion gets us as excited as the crowd when the beat drops at a Daft Punk concert.
Happily, Taisun Enterprise’s impressive interest cover implies it has the upper hand on its debt. And the good news does not stop there, as its conversion of EBIT to free cash flow also supports that impression! We think Taisun Enterprise is no more beholden to its lenders, than the birds are to birdwatchers. For investing nerds like us its balance sheet is almost charming. Above most other metrics, we think its important to track how fast earnings per share is growing, if at all. If you’ve also come to that realization, you’re in luck, because today you can view this interactive graph of Taisun Enterprise’s earnings per share history for free.
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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