Is Sun Yad ConstructionLtd (TPE:1316) Using Debt In A Risky Way?

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. We can see that Sun Yad Construction Co.,Ltd (TPE:1316) does use debt in its business. But the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. If things get really bad, the lenders can take control of the business. 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, debt can be an important tool in businesses, particularly capital heavy businesses. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for Sun Yad ConstructionLtd

What Is Sun Yad ConstructionLtd's Debt?

As you can see below, at the end of December 2020, Sun Yad ConstructionLtd had NT$3.89b of debt, up from NT$3.68b a year ago. Click the image for more detail. However, it does have NT$253.5m in cash offsetting this, leading to net debt of about NT$3.64b.

A Look At Sun Yad ConstructionLtd's Liabilities

Zooming in on the latest balance sheet data, we can see that Sun Yad ConstructionLtd had liabilities of NT$4.47b due within 12 months and liabilities of NT$12.2m due beyond that. Offsetting these obligations, it had cash of NT$253.5m as well as receivables valued at NT$100.4m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by NT$4.13b.

The deficiency here weighs heavily on the NT$1.97b company itself, as if a child were struggling under the weight of an enormous back-pack full of books, his sports gear, and a trumpet. So we'd watch its balance sheet closely, without a doubt. At the end of the day, Sun Yad ConstructionLtd would probably need a major re-capitalization if its creditors were to demand repayment. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Sun Yad ConstructionLtd'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.

In the last year Sun Yad ConstructionLtd wasn't profitable at an EBIT level, but managed to grow its revenue by 71%, to NT$1.2b. Shareholders probably have their fingers crossed that it can grow its way to profits.

Caveat Emptor

Even though Sun Yad ConstructionLtd managed to grow its top line quite deftly, the cold hard truth is that it is losing money on the EBIT line. To be specific the EBIT loss came in at NT$32m. Considering that alongside the liabilities mentioned above make us nervous about the company. It would need to improve its operations quickly for us to be interested in it. Not least because it had negative free cash flow of NT$61m over the last twelve months. So suffice it to say we consider the stock to be risky. 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. We've identified 2 warning signs with Sun Yad ConstructionLtd (at least 1 which is potentially serious) , and understanding them should be part of your investment process.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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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