Symtek Automation Asia (GTSM:6438) Has A Pretty Healthy Balance Sheet

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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 note that Symtek Automation Asia Co., Ltd. (GTSM:6438) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. 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 think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for Symtek Automation Asia

How Much Debt Does Symtek Automation Asia Carry?

You can click the graphic below for the historical numbers, but it shows that Symtek Automation Asia had NT$760.0m of debt in September 2020, down from NT$918.4m, one year before. But it also has NT$1.16b in cash to offset that, meaning it has NT$403.8m net cash.

How Healthy Is Symtek Automation Asia's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Symtek Automation Asia had liabilities of NT$1.74b due within 12 months and liabilities of NT$541.1m due beyond that. Offsetting these obligations, it had cash of NT$1.16b as well as receivables valued at NT$1.31b due within 12 months. So it can boast NT$196.8m more liquid assets than total liabilities.

This surplus suggests that Symtek Automation Asia has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, Symtek Automation Asia boasts net cash, so it's fair to say it does not have a heavy debt load!

Better yet, Symtek Automation Asia grew its EBIT by 157% last year, which is an impressive improvement. That boost will make it even easier to pay down debt going forward. There's no doubt that we learn most about debt from the balance sheet. But it is Symtek Automation Asia'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.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. While Symtek Automation Asia has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. Over the last three years, Symtek Automation Asia reported free cash flow worth 7.0% of its EBIT, which is really quite low. For us, cash conversion that low sparks a little paranoia about is ability to extinguish debt.

Summing up

While we empathize with investors who find debt concerning, you should keep in mind that Symtek Automation Asia has net cash of NT$403.8m, as well as more liquid assets than liabilities. And we liked the look of last year's 157% year-on-year EBIT growth. So is Symtek Automation Asia's debt a risk? It doesn't seem so to us. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. Take risks, for example - Symtek Automation Asia has 2 warning signs (and 1 which doesn't sit too well with us) we think you should know about.

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.

If you decide to trade Symtek Automation Asia, use the lowest-cost* platform that is rated #1 Overall by Barron’s, Interactive Brokers. Trade stocks, options, futures, forex, bonds and funds on 135 markets, all from a single integrated account. Promoted

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.
^*Interactive Brokers Rated Lowest Cost Broker by StockBrokers.com Annual Online Review 2020

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.