San Neng Group Holdings (TPE:6671) Has A Rock Solid Balance Sheet

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. Importantly, San Neng Group Holdings Co., Ltd. (TPE:6671) does carry debt. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for San Neng Group Holdings

How Much Debt Does San Neng Group Holdings Carry?

The image below, which you can click on for greater detail, shows that San Neng Group Holdings had debt of NT$237.4m at the end of September 2020, a reduction from NT$248.2m over a year. However, it does have NT$567.8m in cash offsetting this, leading to net cash of NT$330.4m.

A Look At San Neng Group Holdings' Liabilities

Zooming in on the latest balance sheet data, we can see that San Neng Group Holdings had liabilities of NT$408.5m due within 12 months and liabilities of NT$152.1m due beyond that. Offsetting these obligations, it had cash of NT$567.8m as well as receivables valued at NT$237.9m due within 12 months. So it can boast NT$245.0m more liquid assets than total liabilities.

This short term liquidity is a sign that San Neng Group Holdings could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, San Neng Group Holdings boasts net cash, so it's fair to say it does not have a heavy debt load!

In addition to that, we're happy to report that San Neng Group Holdings has boosted its EBIT by 33%, thus reducing the spectre of future debt repayments. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since San Neng Group Holdings 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, a business needs free cash flow to pay off debt; accounting profits just don't cut it. While San Neng Group Holdings 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, San Neng Group Holdings recorded free cash flow worth a fulsome 92% 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 we empathize with investors who find debt concerning, you should keep in mind that San Neng Group Holdings has net cash of NT$330.4m, as well as more liquid assets than liabilities. The cherry on top was that in converted 92% of that EBIT to free cash flow, bringing in NT$251m. So we don't think San Neng Group Holdings's use of debt is risky. 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. Like risks, for instance. Every company has them, and we've spotted 3 warning signs for San Neng Group Holdings (of which 1 is potentially serious!) you should know about.

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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