Is Well Shin Technology (TPE:3501) A Risky Investment?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. We can see that Well Shin Technology Co., Ltd. (TPE:3501) does use debt in its business. But the real question is whether this debt is making the company risky.

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for Well Shin Technology

What Is Well Shin Technology's Debt?

The image below, which you can click on for greater detail, shows that Well Shin Technology had debt of NT$220.0m at the end of September 2020, a reduction from NT$695.0m over a year. But it also has NT$1.91b in cash to offset that, meaning it has NT$1.69b net cash.

How Strong Is Well Shin Technology's Balance Sheet?

According to the last reported balance sheet, Well Shin Technology had liabilities of NT$1.20b due within 12 months, and liabilities of NT$480.4m due beyond 12 months. Offsetting these obligations, it had cash of NT$1.91b as well as receivables valued at NT$1.56b due within 12 months. So it can boast NT$1.79b more liquid assets than total liabilities.

This luscious liquidity implies that Well Shin Technology's balance sheet is sturdy like a giant sequoia tree. Having regard to this fact, we think its balance sheet is as strong as an ox. Succinctly put, Well Shin Technology boasts net cash, so it's fair to say it does not have a heavy debt load!

But the other side of the story is that Well Shin Technology saw its EBIT decline by 8.3% over the last year. That sort of decline, if sustained, will obviously make debt harder to handle. The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine Well Shin Technology'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 Well Shin Technology 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, Well Shin Technology recorded free cash flow worth a fulsome 90% of its EBIT, which is stronger than we'd usually expect. That puts it in a very strong position to pay down debt.

Summing up

While it is always sensible to investigate a company's debt, in this case Well Shin Technology has NT$1.69b in net cash and a decent-looking balance sheet. The cherry on top was that in converted 90% of that EBIT to free cash flow, bringing in NT$580m. So is Well Shin Technology'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. Be aware that Well Shin Technology is showing 1 warning sign in our investment analysis , you should know about...

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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