Stock Analysis

We Think Sheng Yu Steel (TPE:2029) Can Manage Its Debt With Ease

TWSE:2029
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Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' 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. We can see that Sheng Yu Steel Co., Ltd. (TPE:2029) does use debt in its business. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. If things get really bad, the lenders can take control of the business. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for Sheng Yu Steel

What Is Sheng Yu Steel's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of September 2020 Sheng Yu Steel had NT$126.2m of debt, an increase on NT$91.1m, over one year. But it also has NT$4.07b in cash to offset that, meaning it has NT$3.94b net cash.

debt-equity-history-analysis
TSEC:2029 Debt to Equity History February 1st 2021

How Strong Is Sheng Yu Steel's Balance Sheet?

We can see from the most recent balance sheet that Sheng Yu Steel had liabilities of NT$731.2m falling due within a year, and liabilities of NT$220.4m due beyond that. On the other hand, it had cash of NT$4.07b and NT$750.9m worth of receivables due within a year. So it can boast NT$3.87b more liquid assets than total liabilities.

This surplus liquidity suggests that Sheng Yu Steel's balance sheet could take a hit just as well as Homer Simpson's head can take a punch. With this in mind one could posit that its balance sheet means the company is able to handle some adversity. Succinctly put, Sheng Yu Steel boasts net cash, so it's fair to say it does not have a heavy debt load!

Even more impressive was the fact that Sheng Yu Steel grew its EBIT by 138% over twelve months. If maintained that growth will make the debt even more manageable in the years ahead. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Sheng Yu Steel'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. Sheng Yu Steel may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. Over the last three years, Sheng Yu Steel actually produced more free cash flow than EBIT. There's nothing better than incoming cash when it comes to staying in your lenders' good graces.

Summing up

While it is always sensible to investigate a company's debt, in this case Sheng Yu Steel has NT$3.94b in net cash and a decent-looking balance sheet. The cherry on top was that in converted 296% of that EBIT to free cash flow, bringing in NT$827m. The bottom line is that Sheng Yu Steel's use of debt is absolutely fine. Over time, share prices tend to follow earnings per share, so if you're interested in Sheng Yu Steel, you may well want to click here to check an interactive graph of its earnings per share history.

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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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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