Is Sentien Printing Factory (GTSM:8410) A Risky Investment?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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 Sentien Printing Factory Co., Ltd. (GTSM:8410) 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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. 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 Sentien Printing Factory

How Much Debt Does Sentien Printing Factory Carry?

You can click the graphic below for the historical numbers, but it shows that as of December 2020 Sentien Printing Factory had NT$63.7m of debt, an increase on NT$36.5m, over one year. But it also has NT$557.1m in cash to offset that, meaning it has NT$493.4m net cash.

A Look At Sentien Printing Factory's Liabilities

According to the last reported balance sheet, Sentien Printing Factory had liabilities of NT$339.8m due within 12 months, and liabilities of NT$173.4m due beyond 12 months. Offsetting these obligations, it had cash of NT$557.1m as well as receivables valued at NT$540.7m due within 12 months. So it can boast NT$584.6m more liquid assets than total liabilities.

It's good to see that Sentien Printing Factory has plenty of liquidity on its balance sheet, suggesting conservative management of liabilities. Because it has plenty of assets, it is unlikely to have trouble with its lenders. Simply put, the fact that Sentien Printing Factory has more cash than debt is arguably a good indication that it can manage its debt safely.

Even more impressive was the fact that Sentien Printing Factory grew its EBIT by 109% over twelve months. That boost will make it even easier to pay down debt going forward. When analysing debt levels, the balance sheet is the obvious place to start. But it is Sentien Printing Factory'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.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. While Sentien Printing Factory 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 most recent three years, Sentien Printing Factory recorded free cash flow worth 65% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This free cash flow puts the company in a good position to pay down debt, when appropriate.

Summing up

While it is always sensible to investigate a company's debt, in this case Sentien Printing Factory has NT$493.4m in net cash and a decent-looking balance sheet. And it impressed us with its EBIT growth of 109% over the last year. So is Sentien Printing Factory'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. Case in point: We've spotted 2 warning signs for Sentien Printing Factory you should be aware of.

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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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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