Sentien Printing Factory (GTSM:8410) Seems To Use Debt Rather Sparingly

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.' 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. We can see that Sentien Printing Factory Co., Ltd. (GTSM:8410) does use debt in its business. But the real question is whether this debt is making the company risky.

When Is Debt A Problem?

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. 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 think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for Sentien Printing Factory

What Is Sentien Printing Factory's Debt?

As you can see below, Sentien Printing Factory had NT$46.6m of debt at September 2020, down from NT$53.6m a year prior. But it also has NT$497.2m in cash to offset that, meaning it has NT$450.6m net cash.

How Strong Is Sentien Printing Factory's Balance Sheet?

We can see from the most recent balance sheet that Sentien Printing Factory had liabilities of NT$324.6m falling due within a year, and liabilities of NT$173.5m due beyond that. On the other hand, it had cash of NT$497.2m and NT$557.9m worth of receivables due within a year. So it actually has NT$557.0m more liquid assets than total liabilities.

This excess liquidity is a great indication that Sentien Printing Factory's balance sheet is just as strong as racists are weak. On this view, lenders should feel as safe as the beloved of a black-belt karate master. 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 146% over twelve months. If maintained that growth will make the debt even more manageable in the years ahead. 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 when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. 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 74% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This cold hard cash means it can reduce its debt when it wants to.

Summing up

While it is always sensible to investigate a company's debt, in this case Sentien Printing Factory has NT$450.6m in net cash and a decent-looking balance sheet. And we liked the look of last year's 146% year-on-year EBIT growth. When it comes to Sentien Printing Factory's debt, we sufficiently relaxed that our mind turns to the jacuzzi. 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. Consider risks, for instance. Every company has them, and we've spotted 3 warning signs for Sentien Printing Factory 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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