Is Sunko Ink (TWSE:1721) A Risky Investment?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. Importantly, Sunko Ink Co., Ltd. (TWSE:1721) does carry debt. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

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. If things get really bad, the lenders can take control of the business. 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. 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 Sunko Ink

What Is Sunko Ink's Debt?

As you can see below, at the end of June 2024, Sunko Ink had NT$1.11b of debt, up from NT$759.7m a year ago. Click the image for more detail. However, because it has a cash reserve of NT$601.1m, its net debt is less, at about NT$508.4m.

How Strong Is Sunko Ink's Balance Sheet?

We can see from the most recent balance sheet that Sunko Ink had liabilities of NT$864.8m falling due within a year, and liabilities of NT$839.3m due beyond that. On the other hand, it had cash of NT$601.1m and NT$485.6m worth of receivables due within a year. So its liabilities total NT$617.3m more than the combination of its cash and short-term receivables.

Given Sunko Ink has a market capitalization of NT$3.93b, it's hard to believe these liabilities pose much threat. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. There's no doubt that we learn most about debt from the balance sheet. But it is Sunko Ink's earnings that will influence how the balance sheet holds up in the future. 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.

Over 12 months, Sunko Ink made a loss at the EBIT level, and saw its revenue drop to NT$2.3b, which is a fall of 7.1%. We would much prefer see growth.

Caveat Emptor

Over the last twelve months Sunko Ink produced an earnings before interest and tax (EBIT) loss. Indeed, it lost NT$225m at the EBIT level. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. So we think its balance sheet is a little strained, though not beyond repair. Another cause for caution is that is bled NT$91m in negative free cash flow over the last twelve months. So suffice it to say we do consider the stock to be risky. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. To that end, you should be aware of the 2 warning signs we've spotted with Sunko Ink .

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. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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.