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

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. We can see that Sunf Pu Technology Co., Ltd. (GTSM:5488) does use debt in its business. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

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 common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for Sunf Pu Technology

What Is Sunf Pu Technology's Net Debt?

The chart below, which you can click on for greater detail, shows that Sunf Pu Technology had NT$231.9m in debt in December 2020; about the same as the year before. But it also has NT$496.7m in cash to offset that, meaning it has NT$264.8m net cash.

How Healthy Is Sunf Pu Technology's Balance Sheet?

According to the last reported balance sheet, Sunf Pu Technology had liabilities of NT$322.7m due within 12 months, and liabilities of NT$116.4m due beyond 12 months. On the other hand, it had cash of NT$496.7m and NT$331.3m worth of receivables due within a year. So it actually has NT$388.9m 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). With this in mind one could posit that its balance sheet means the company is able to handle some adversity. 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. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Sunf Pu Technology's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

In the last year Sunf Pu Technology had a loss before interest and tax, and actually shrunk its revenue by 14%, to NT$1.1b. That's not what we would hope to see.

So How Risky Is Sunf Pu Technology?

While Sunf Pu Technology lost money on an earnings before interest and tax (EBIT) level, it actually generated positive free cash flow NT$29m. 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. With mediocre revenue growth in the last year, we're don't find the investment opportunity particularly compelling. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. For instance, we've identified 3 warning signs for Sunf Pu Technology (1 makes us a bit uncomfortable) you should be aware of.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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This article by Simply Wall St is general in nature. 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.
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