Here's Why SciVision Biotech (TPE:1786) 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.' 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, SciVision Biotech Inc. (TPE:1786) does carry debt. But the more important question is: how much risk is that debt creating?

When Is Debt Dangerous?

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 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, 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 SciVision Biotech

What Is SciVision Biotech's Debt?

The chart below, which you can click on for greater detail, shows that SciVision Biotech had NT$294.9m in debt in September 2020; about the same as the year before. However, it does have NT$376.6m in cash offsetting this, leading to net cash of NT$81.7m.

A Look At SciVision Biotech's Liabilities

According to the last reported balance sheet, SciVision Biotech had liabilities of NT$137.5m due within 12 months, and liabilities of NT$357.0m due beyond 12 months. Offsetting this, it had NT$376.6m in cash and NT$94.0m in receivables that were due within 12 months. So it has liabilities totalling NT$23.9m more than its cash and near-term receivables, combined.

This state of affairs indicates that SciVision Biotech's balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So while it's hard to imagine that the NT$3.50b company is struggling for cash, we still think it's worth monitoring its balance sheet. Despite its noteworthy liabilities, SciVision Biotech boasts net cash, so it's fair to say it does not have a heavy debt load!

Another good sign is that SciVision Biotech has been able to increase its EBIT by 26% in twelve months, making it easier to pay down debt. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since SciVision Biotech 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. SciVision Biotech 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. Considering the last three years, SciVision Biotech actually recorded a cash outflow, overall. Debt is usually more expensive, and almost always more risky in the hands of a company with negative free cash flow. Shareholders ought to hope for an improvement.

Summing up

While it is always sensible to look at a company's total liabilities, it is very reassuring that SciVision Biotech has NT$81.7m in net cash. And it impressed us with its EBIT growth of 26% over the last year. So we are not troubled with SciVision Biotech's debt use. 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. For example, we've discovered 1 warning sign for SciVision Biotech that you should be aware of before investing here.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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