Is SunVic Technology (GTSM:4304) Using Debt Sensibly?

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.' 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. We note that SunVic Technology Co., Ltd. (GTSM:4304) does have debt on its balance sheet. But is this debt a concern to shareholders?

When Is Debt Dangerous?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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 SunVic Technology

What Is SunVic Technology's Net Debt?

As you can see below, SunVic Technology had NT$298.6m of debt, at September 2020, which is about the same as the year before. You can click the chart for greater detail. However, because it has a cash reserve of NT$15.9m, its net debt is less, at about NT$282.8m.

A Look At SunVic Technology's Liabilities

The latest balance sheet data shows that SunVic Technology had liabilities of NT$404.7m due within a year, and liabilities of NT$26.5m falling due after that. On the other hand, it had cash of NT$15.9m and NT$138.5m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by NT$276.9m.

When you consider that this deficiency exceeds the company's NT$197.8m market capitalization, you might well be inclined to review the balance sheet intently. Hypothetically, extremely heavy dilution would be required if the company were forced to pay down its liabilities by raising capital at the current share price. There's no doubt that we learn most about debt from the balance sheet. But it is SunVic Technology'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.

Over 12 months, SunVic Technology made a loss at the EBIT level, and saw its revenue drop to NT$389m, which is a fall of 8.5%. That's not what we would hope to see.

Caveat Emptor

Importantly, SunVic Technology had an earnings before interest and tax (EBIT) loss over the last year. Its EBIT loss was a whopping NT$32m. When we look at that alongside the significant liabilities, we're not particularly confident about the company. We'd want to see some strong near-term improvements before getting too interested in the stock. For example, we would not want to see a repeat of last year's loss of NT$58m. In the meantime, we consider the stock to be risky. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. Be aware that SunVic Technology is showing 2 warning signs in our investment analysis , you should know about...

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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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