These 4 Measures Indicate That San Neng Group Holdings (TPE:6671) Is Using Debt Safely

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. As with many other companies San Neng Group Holdings Co., Ltd. (TPE:6671) makes use of debt. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

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. 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.

See our latest analysis for San Neng Group Holdings

How Much Debt Does San Neng Group Holdings Carry?

You can click the graphic below for the historical numbers, but it shows that San Neng Group Holdings had NT$204.8m of debt in December 2020, down from NT$241.7m, one year before. However, it does have NT$681.0m in cash offsetting this, leading to net cash of NT$476.2m.

How Healthy Is San Neng Group Holdings' Balance Sheet?

The latest balance sheet data shows that San Neng Group Holdings had liabilities of NT$447.7m due within a year, and liabilities of NT$147.4m falling due after that. On the other hand, it had cash of NT$681.0m and NT$265.1m worth of receivables due within a year. So it actually has NT$351.0m 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!

On top of that, San Neng Group Holdings grew its EBIT by 34% 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 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. San Neng Group Holdings 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. During the last three years, San Neng Group Holdings generated free cash flow amounting to a very robust 96% of its EBIT, more than we'd 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$476.2m, as well as more liquid assets than liabilities. And it impressed us with free cash flow of NT$243m, being 96% of its EBIT. So is San Neng Group Holdings'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. However, not all investment risk resides within the balance sheet - far from it. To that end, you should learn about the 2 warning signs we've spotted with San Neng Group Holdings (including 1 which shouldn't be ignored) .

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.

If you decide to trade San Neng Group Holdings, use the lowest-cost* platform that is rated #1 Overall by Barron’s, Interactive Brokers. Trade stocks, options, futures, forex, bonds and funds on 135 markets, all from a single integrated account. Promoted

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 (at) simplywallst.com.