- Taiwan
- /
- Consumer Durables
- /
- TWSE:4930
Here's Why Star Comgistic Capital (TPE:4930) Can Manage Its Debt Responsibly
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. As with many other companies Star Comgistic Capital Co., Ltd. (TPE:4930) makes use of debt. But the more important question is: how much risk is that debt creating?
When Is Debt Dangerous?
Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. 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, debt can be an important tool in businesses, particularly capital heavy businesses. When we think about a company's use of debt, we first look at cash and debt together.
Check out our latest analysis for Star Comgistic Capital
What Is Star Comgistic Capital's Debt?
The image below, which you can click on for greater detail, shows that Star Comgistic Capital had debt of NT$768.0m at the end of September 2020, a reduction from NT$812.2m over a year. However, it does have NT$6.26b in cash offsetting this, leading to net cash of NT$5.49b.
How Strong Is Star Comgistic Capital's Balance Sheet?
According to the last reported balance sheet, Star Comgistic Capital had liabilities of NT$4.74b due within 12 months, and liabilities of NT$3.42b due beyond 12 months. Offsetting these obligations, it had cash of NT$6.26b as well as receivables valued at NT$2.15b due within 12 months. So it can boast NT$248.8m more liquid assets than total liabilities.
This surplus suggests that Star Comgistic Capital has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Simply put, the fact that Star Comgistic Capital has more cash than debt is arguably a good indication that it can manage its debt safely.
Even more impressive was the fact that Star Comgistic Capital grew its EBIT by 134% over twelve months. If maintained that growth will make the debt even more manageable in the years ahead. There's no doubt that we learn most about debt from the balance sheet. But it is Star Comgistic Capital's earnings that will influence how the balance sheet holds up in the future. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.
But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. Star Comgistic Capital may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. In the last two years, Star Comgistic Capital created free cash flow amounting to 19% of its EBIT, an uninspiring performance. 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 Star Comgistic Capital has net cash of NT$5.49b, as well as more liquid assets than liabilities. And we liked the look of last year's 134% year-on-year EBIT growth. So we don't think Star Comgistic Capital's use of debt is risky. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. Case in point: We've spotted 5 warning signs for Star Comgistic Capital you should be aware of, and 2 of them are a bit concerning.
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’re looking to trade Star Comgistic Capital, open an account with the lowest-cost* platform trusted by professionals, Interactive Brokers. Their clients from over 200 countries and territories trade stocks, options, futures, forex, bonds and funds worldwide from a single integrated account. Promoted
New: Manage All Your Stock Portfolios in One Place
We've created the ultimate portfolio companion for stock investors, and it's free.
• Connect an unlimited number of Portfolios and see your total in one currency
• Be alerted to new Warning Signs or Risks via email or mobile
• Track the Fair Value of your stocks
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@simplywallst.com.
About TWSE:4930
Star Comgistic Capital
Manufactures and sells small home appliances in America, Asia, Europe, Africa, and Australia.
Flawless balance sheet and good value.