Is Symtek Automation Asia (TPE:6438) Using Too Much Debt?

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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 Symtek Automation Asia Co., Ltd. (TPE:6438) does use debt in its business. But should shareholders be worried about its use of debt?

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. 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.

Check out 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$704.6m of debt in December 2020, down from NT$887.5m, one year before. But it also has NT$1.54b in cash to offset that, meaning it has NT$831.8m 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$2.44b due within 12 months and liabilities of NT$167.4m due beyond that. Offsetting these obligations, it had cash of NT$1.54b as well as receivables valued at NT$1.24b due within 12 months. So it can boast NT$172.5m 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 773% last year, which is an impressive improvement. That boost will make it even easier to pay down debt going forward. 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 Symtek Automation Asia'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, a business needs free cash flow to pay off debt; accounting profits just don't cut it. 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. During the last three years, Symtek Automation Asia produced sturdy free cash flow equating to 74% of its EBIT, about what we'd expect. This cold hard cash means it can reduce its debt when it wants to.

Summing up

While it is always sensible to investigate a company's debt, in this case Symtek Automation Asia has NT$831.8m in net cash and a decent-looking balance sheet. And it impressed us with its EBIT growth of 773% over the last year. So is Symtek Automation Asia's debt a risk? It doesn't seem so to us. The balance sheet is clearly the area to focus on when you are analysing debt. 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 Symtek Automation Asia .

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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