Legendary fund manager Li Lu (who was backed by Charlie Munger) once said, “The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.” So it may be obvious that you need to consider debt when thinking about how risky a particular stock is, because too much debt can bankrupt a company. We can see that Ta Liang Technology Co., Ltd. (TWSE:3167) does indeed use debt in its business. But is this debt a cause for concern for shareholders?
When is debt dangerous?
Generally, debt only becomes a real problem when a company can’t easily pay it back, either by raising capital or with its own cash flow. If things go really bad, lenders can take control of the company. While this doesn’t happen too often, we often see indebted companies permanently dilute their shareholder base because lenders force them to raise capital at a fire-sale price. Of course, many companies use debt to fund growth without suffering any negative consequences. When we examine debt levels, we first look at both cash and debt levels together.
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How much debt does Ta Liang Technology have?
The image below, which you can click on to see more details, shows that Ta Liang Technology had NT$1.20 billion in debt at the end of March 2024, a reduction of NT$1.37 billion in one year. On the other hand, the company has NT$627.7 million in cash, resulting in net debt of about NT$573.5 million.
A look at Ta Liang Technology’s liabilities
From the most recent balance sheet, Ta Liang Technology had liabilities of NT$1.24 billion due within a year and liabilities of NT$837.5 million due thereafter, offset by NT$627.7 million in cash and NT$883.7 million in receivables due within 12 months. So the company’s liabilities total NT$566.8 million more than its cash and near-term receivables combined.
Since Ta Liang Technology’s listed shares are worth a total of NT$6.45b, it seems unlikely that this level of liabilities would pose a major threat. However, we think it’s worth keeping an eye on the company’s balance sheet strength, as it may change over time. When analyzing debt levels, the balance sheet is the obvious place to start. But you can’t look at debt completely in isolation, as Ta Liang Technology needs profits to service that debt. So when looking at debt, it’s certainly worth looking at the earnings trend. Click here for an interactive snapshot.
Last year, Ta Liang Technology posted a loss before interest and taxes and saw its revenue shrink by 24% to NT$1.4 billion. That makes us nervous, to say the least.
Reservation by the buyer
Not only has Ta Liang Technology’s revenue declined over the past twelve months, but the company has also posted negative earnings before interest and taxes (EBIT). More specifically, the EBIT loss came in at NT$71 million. When we look at this and recall the liabilities on the balance sheet relative to cash, it seems unwise to us that the company has debt. Frankly, we think the balance sheet is far from balanced, although it could be improved over time. Surprisingly, we find that the company actually reported positive free cash flow of NT$411 million and profit of NT$20 million. So, focusing on these metrics, there seems to be a chance that the company will manage its debt without much trouble. When analyzing debt levels, the balance sheet is the obvious place to start. However, not all investment risks are contained in the balance sheet – quite the opposite. For example, we found that 4 warning signs for Ta Liang Technology (2 are a bit unpleasant!) that you should know before investing here.
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 Simply Wall St article is of a general nature. We comment solely on the basis of historical data and analyst forecasts, using an unbiased methodology. Our articles do not constitute financial advice. It is not a recommendation to buy or sell any stock and does not take into account your objectives or financial situation. Our goal is to provide you with long-term analysis based on fundamental data. Note that our analysis may not take into account the latest price-sensitive company announcements or qualitative materials. Simply Wall St does not hold any of the stocks mentioned.
