These 4 Measures Indicate That Swancor Holding (TPE:3708) Is Using Debt Safely

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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. Importantly, Swancor Holding Co., LTD. (TPE:3708) does carry 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. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for Swancor Holding

What Is Swancor Holding's Net Debt?

The image below, which you can click on for greater detail, shows that Swancor Holding had debt of NT$1.47b at the end of December 2020, a reduction from NT$1.65b over a year. But on the other hand it also has NT$1.60b in cash, leading to a NT$135.2m net cash position.

How Strong Is Swancor Holding's Balance Sheet?

According to the last reported balance sheet, Swancor Holding had liabilities of NT$5.24b due within 12 months, and liabilities of NT$559.4m due beyond 12 months. Offsetting these obligations, it had cash of NT$1.60b as well as receivables valued at NT$6.11b due within 12 months. So it can boast NT$1.91b more liquid assets than total liabilities.

This surplus suggests that Swancor Holding is using debt in a way that is appears to be both safe and conservative. Due to its strong net asset position, it is not likely to face issues with its lenders. Succinctly put, Swancor Holding boasts net cash, so it's fair to say it does not have a heavy debt load!

Better yet, Swancor Holding grew its EBIT by 192% last year, which is an impressive improvement. That boost will make it even easier to pay down debt going forward. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if Swancor Holding can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. Swancor Holding 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. Looking at the most recent two years, Swancor Holding recorded free cash flow of 27% of its EBIT, which is weaker than we'd expect. That's not great, when it comes to paying down debt.

Summing up

While it is always sensible to investigate a company's debt, in this case Swancor Holding has NT$135.2m in net cash and a decent-looking balance sheet. And we liked the look of last year's 192% year-on-year EBIT growth. So is Swancor Holding's debt a risk? It doesn't seem so to us. 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. For example, we've discovered 1 warning sign for Swancor Holding 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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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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