Is Sunf Pu Technology (GTSM:5488) Using Debt Sensibly?

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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. We can see that Sunf Pu Technology Co., Ltd. (GTSM:5488) does use debt in its business. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. 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.

See our latest analysis for Sunf Pu Technology

What Is Sunf Pu Technology's Debt?

As you can see below, Sunf Pu Technology had NT$239.8m of debt, at September 2020, which is about the same as the year before. You can click the chart for greater detail. But it also has NT$498.1m in cash to offset that, meaning it has NT$258.3m net cash.

A Look At Sunf Pu Technology's Liabilities

Zooming in on the latest balance sheet data, we can see that Sunf Pu Technology had liabilities of NT$321.4m due within 12 months and liabilities of NT$123.2m due beyond that. On the other hand, it had cash of NT$498.1m and NT$325.3m worth of receivables due within a year. So it actually has NT$378.7m more liquid assets than total liabilities.

This surplus strongly suggests that Sunf Pu Technology has a rock-solid balance sheet (and the debt is of no concern whatsoever). Having regard to this fact, we think its balance sheet is as strong as an ox. Simply put, the fact that Sunf Pu Technology has more cash than debt is arguably a good indication that it can manage its debt safely. There's no doubt that we learn most about debt from the balance sheet. But it is Sunf Pu Technology'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.

In the last year Sunf Pu Technology had a loss before interest and tax, and actually shrunk its revenue by 15%, to NT$1.1b. That's not what we would hope to see.

So How Risky Is Sunf Pu Technology?

Although Sunf Pu Technology had an earnings before interest and tax (EBIT) loss over the last twelve months, it generated positive free cash flow of NT$28m. So taking that on face value, and considering the net cash situation, we don't think that the stock is too risky in the near term. There's no doubt the next few years will be crucial to how the business matures. 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. Take risks, for example - Sunf Pu Technology has 1 warning sign we think you should be aware of.

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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