Sunko Ink (TPE:1721) Has Debt But No Earnings; Should You Worry?

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says '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. As with many other companies Sunko Ink Co., Ltd. (TPE:1721) makes use of debt. But the more important question is: how much risk is that debt creating?

What Risk Does Debt Bring?

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. 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, 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.

Check out our latest analysis for Sunko Ink

What Is Sunko Ink's Net Debt?

The image below, which you can click on for greater detail, shows that at September 2020 Sunko Ink had debt of NT$1.15b, up from NT$1.06b in one year. But on the other hand it also has NT$1.47b in cash, leading to a NT$317.9m net cash position.

A Look At Sunko Ink's Liabilities

According to the last reported balance sheet, Sunko Ink had liabilities of NT$1.22b due within 12 months, and liabilities of NT$883.6m due beyond 12 months. Offsetting this, it had NT$1.47b in cash and NT$544.9m in receivables that were due within 12 months. So its liabilities total NT$89.2m more than the combination of its cash and short-term receivables.

Since publicly traded Sunko Ink shares are worth a total of NT$1.64b, it seems unlikely that this level of liabilities would be a major threat. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. Despite its noteworthy liabilities, Sunko Ink boasts net cash, so it's fair to say it does not have a heavy debt load! The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since Sunko Ink 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.

In the last year Sunko Ink had a loss before interest and tax, and actually shrunk its revenue by 11%, to NT$2.9b. We would much prefer see growth.

So How Risky Is Sunko Ink?

Although Sunko Ink had an earnings before interest and tax (EBIT) loss over the last twelve months, it made a statutory profit of NT$568m. So when you consider it has net cash, along with the statutory profit, the stock probably isn't as risky as it might seem, at least in the short term. Until we see some positive EBIT, we're a bit cautious of the stock, not least because of the rather modest revenue growth. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. For example, we've discovered 4 warning signs for Sunko Ink (1 makes us a bit uncomfortable!) that you should be aware of before investing here.

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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