Shin Zu Shing (TPE:3376) Has A Rock Solid Balance Sheet

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.' 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 Shin Zu Shing Co., Ltd. (TPE:3376) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

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. If things get really bad, the lenders can take control of the business. 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.

View our latest analysis for Shin Zu Shing

What Is Shin Zu Shing's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of September 2020 Shin Zu Shing had NT$1.46b of debt, an increase on NT$1.06b, over one year. But it also has NT$7.35b in cash to offset that, meaning it has NT$5.89b net cash.

A Look At Shin Zu Shing's Liabilities

According to the last reported balance sheet, Shin Zu Shing had liabilities of NT$5.85b due within 12 months, and liabilities of NT$636.6m due beyond 12 months. Offsetting these obligations, it had cash of NT$7.35b as well as receivables valued at NT$5.89b due within 12 months. So it can boast NT$6.75b more liquid assets than total liabilities.

It's good to see that Shin Zu Shing has plenty of liquidity on its balance sheet, suggesting conservative management of liabilities. Given it has easily adequate short term liquidity, we don't think it will have any issues with its lenders. Simply put, the fact that Shin Zu Shing has more cash than debt is arguably a good indication that it can manage its debt safely.

On top of that, Shin Zu Shing grew its EBIT by 38% over the last twelve months, and that growth will make it easier to handle its debt. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine Shin Zu Shing's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While Shin Zu Shing 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 most recent three years, Shin Zu Shing recorded free cash flow worth 75% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This free cash flow puts the company in a good position to pay down debt, when appropriate.

Summing up

While we empathize with investors who find debt concerning, you should keep in mind that Shin Zu Shing has net cash of NT$5.89b, as well as more liquid assets than liabilities. And we liked the look of last year's 38% year-on-year EBIT growth. When it comes to Shin Zu Shing's debt, we sufficiently relaxed that our mind turns to the jacuzzi. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. To that end, you should be aware of the 2 warning signs we've spotted with Shin Zu Shing .

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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