Warren Buffett famously said, ‘Volatility is far from synonymous with risk.’ 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. As with many other companies Taihan Textile Co., Ltd. (KRX:001070) makes use of debt. But the real question is whether this debt is making the company risky.
Why Does Debt Bring Risk?
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. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. When we think about a company’s use of debt, we first look at cash and debt together.
View our latest analysis for Taihan Textile
What Is Taihan Textile’s Debt?
You can click the graphic below for the historical numbers, but it shows that as of September 2020 Taihan Textile had ₩41.7b of debt, an increase on ₩25.6b, over one year. On the flip side, it has ₩24.8b in cash leading to net debt of about ₩17.0b.
How Healthy Is Taihan Textile’s Balance Sheet?
According to the last reported balance sheet, Taihan Textile had liabilities of ₩47.4b due within 12 months, and liabilities of ₩25.7b due beyond 12 months. Offsetting this, it had ₩24.8b in cash and ₩27.8b in receivables that were due within 12 months. So its liabilities total ₩20.6b more than the combination of its cash and short-term receivables.
Given Taihan Textile has a market capitalization of ₩143.3b, 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. When analysing debt levels, the balance sheet is the obvious place to start. But it is Taihan Textile’s earnings that will influence how the balance sheet holds up in the future. 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.
Over 12 months, Taihan Textile reported revenue of ₩171b, which is a gain of 4.6%, although it did not report any earnings before interest and tax. That rate of growth is a bit slow for our taste, but it takes all types to make a world.
Over the last twelve months Taihan Textile produced an earnings before interest and tax (EBIT) loss. To be specific the EBIT loss came in at ₩4.7b. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. So we think its balance sheet is a little strained, though not beyond repair. However, it doesn’t help that it burned through ₩10b of cash over the last year. So in short it’s a really risky stock. When we look at a riskier company, we like to check how their profits (or losses) are trending over time. Today, we’re providing readers this interactive graph showing how Taihan Textile’s profit, revenue, and operating cashflow have changed over the last few years.
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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