Is Swancor Holding (TPE:3708) A Risky Investment?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. As with many other companies Swancor Holding Co., LTD. (TPE:3708) makes use of debt. But is this debt a concern to shareholders?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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.

See our latest analysis for Swancor Holding

What Is Swancor Holding's Debt?

You can click the graphic below for the historical numbers, but it shows that Swancor Holding had NT$1.23b of debt in September 2020, down from NT$1.54b, one year before. But on the other hand it also has NT$1.58b in cash, leading to a NT$350.9m net cash position.

How Strong Is Swancor Holding's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Swancor Holding had liabilities of NT$4.40b due within 12 months and liabilities of NT$558.0m due beyond that. Offsetting this, it had NT$1.58b in cash and NT$5.23b in receivables that were due within 12 months. So it can boast NT$1.86b more liquid assets than total liabilities.

This short term liquidity is a sign that Swancor Holding could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, Swancor Holding boasts net cash, so it's fair to say it does not have a heavy debt load!

Even more impressive was the fact that Swancor Holding grew its EBIT by 119% over twelve months. That boost will make it even easier to pay down debt going forward. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Swancor Holding's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While Swancor Holding 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. Looking at the most recent three years, Swancor Holding recorded free cash flow of 33% of its EBIT, which is weaker than we'd expect. That's not great, when it comes to paying down debt.

Summing up

While we empathize with investors who find debt concerning, you should keep in mind that Swancor Holding has net cash of NT$350.9m, as well as more liquid assets than liabilities. And it impressed us with its EBIT growth of 119% over the last year. So we don't think Swancor Holding's use of debt is risky. Over time, share prices tend to follow earnings per share, so if you're interested in Swancor Holding, you may well want to click here to check an interactive graph of its earnings per share history.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

If you’re looking to trade Swancor Holding, open an account with the lowest-cost* platform trusted by professionals, Interactive Brokers. Their clients from over 200 countries and territories trade stocks, options, futures, forex, bonds and funds worldwide from a single integrated account. Promoted

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.
^*Interactive Brokers Rated Lowest Cost Broker by StockBrokers.com Annual Online Review 2020

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com.