These 4 Measures Indicate That Star Comgistic Capital (TPE:4930) Is Using Debt Reasonably Well

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 note that Star Comgistic Capital Co., Ltd. (TPE:4930) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

What Risk Does Debt Bring?

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. If things get really bad, the lenders can take control of the business. 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 examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for Star Comgistic Capital

How Much Debt Does Star Comgistic Capital Carry?

As you can see below, Star Comgistic Capital had NT$768.0m of debt at September 2020, down from NT$812.2m a year prior. However, it does have NT$6.26b in cash offsetting this, leading to net cash of NT$5.49b.

How Healthy Is Star Comgistic Capital's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Star Comgistic Capital had liabilities of NT$4.74b due within 12 months and liabilities of NT$3.42b due beyond that. On the other hand, it had cash of NT$6.26b and NT$2.15b worth of receivables due within a year. So it actually has NT$248.8m more liquid assets than total liabilities.

This short term liquidity is a sign that Star Comgistic Capital could probably pay off its debt with ease, as its balance sheet is far from stretched. 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.

Better yet, Star Comgistic Capital grew its EBIT by 134% 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 you can't view debt in total isolation; since Star Comgistic Capital will need earnings to service that debt. 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.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While Star Comgistic Capital 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 two years, Star Comgistic Capital reported free cash flow worth 19% of its EBIT, which is really quite low. That limp level of cash conversion undermines its ability to manage and pay down 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 is Star Comgistic Capital's debt a risk? It doesn't seem so to us. 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. Be aware that Star Comgistic Capital is showing 4 warning signs in our investment analysis , and 2 of those are potentially serious...

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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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.
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