Shin Zu Shing (TWSE:3376) Could Easily Take On More Debt

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. Importantly, Shin Zu Shing Co., Ltd. (TWSE:3376) does carry debt. But should shareholders be worried about its use of debt?

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. 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 examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for Shin Zu Shing

What Is Shin Zu Shing's Debt?

You can click the graphic below for the historical numbers, but it shows that Shin Zu Shing had NT$1.57b of debt in September 2024, down from NT$2.22b, one year before. But it also has NT$6.53b in cash to offset that, meaning it has NT$4.96b net cash.

A Look At Shin Zu Shing's Liabilities

The latest balance sheet data shows that Shin Zu Shing had liabilities of NT$5.14b due within a year, and liabilities of NT$1.24b falling due after that. Offsetting these obligations, it had cash of NT$6.53b as well as receivables valued at NT$5.67b due within 12 months. So it actually has NT$5.82b 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. Due to its strong net asset position, it is not likely to face issues with its lenders. Succinctly put, Shin Zu Shing boasts net cash, so it's fair to say it does not have a heavy debt load!

On top of that, Shin Zu Shing grew its EBIT by 51% over the last twelve months, and that growth will make it easier to handle its debt. When analysing debt levels, the balance sheet is the obvious place to start. 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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs 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 74% 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 it is always sensible to investigate a company's debt, in this case Shin Zu Shing has NT$4.96b in net cash and a decent-looking balance sheet. And we liked the look of last year's 51% year-on-year EBIT growth. So is Shin Zu Shing'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. But ultimately, every company can contain risks that exist outside of the balance sheet. For instance, we've identified 3 warning signs for Shin Zu Shing that 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. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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.