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.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. As with many other companies Sinkang Industries Co., Ltd. (TPE:2032) makes use of debt. But the real question is whether this debt is making the company risky.
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. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first step when considering a company's debt levels is to consider its cash and debt together.
Check out our latest analysis for Sinkang Industries
How Much Debt Does Sinkang Industries Carry?
The image below, which you can click on for greater detail, shows that at September 2020 Sinkang Industries had debt of NT$117.9m, up from NT$58.3m in one year. However, its balance sheet shows it holds NT$185.7m in cash, so it actually has NT$67.8m net cash.
A Look At Sinkang Industries's Liabilities
Zooming in on the latest balance sheet data, we can see that Sinkang Industries had liabilities of NT$225.7m due within 12 months and liabilities of NT$192.4m due beyond that. Offsetting this, it had NT$185.7m in cash and NT$715.8m in receivables that were due within 12 months. So it actually has NT$483.4m more liquid assets than total liabilities.
It's good to see that Sinkang Industries 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 Sinkang Industries has more cash than debt is arguably a good indication that it can manage its debt safely.
In addition to that, we're happy to report that Sinkang Industries has boosted its EBIT by 42%, thus reducing the spectre of future debt repayments. There's no doubt that we learn most about debt from the balance sheet. But it is Sinkang Industries'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, a company can only pay off debt with cold hard cash, not accounting profits. Sinkang Industries 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, Sinkang Industries saw substantial negative free cash flow, in total. While investors are no doubt expecting a reversal of that situation in due course, it clearly does mean its use of debt is more risky.
Summing up
While we empathize with investors who find debt concerning, you should keep in mind that Sinkang Industries has net cash of NT$67.8m, as well as more liquid assets than liabilities. And we liked the look of last year's 42% year-on-year EBIT growth. So is Sinkang Industries's debt a risk? It doesn't seem so to us. 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. Case in point: We've spotted 3 warning signs for Sinkang Industries you should be aware of.
Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.
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About TWSE:2032
Sinkang Industries
Manufactures and sells stainless steel in Taiwan and internationally.
Excellent balance sheet with questionable track record.
