We Think Super Dragon Technology (TWSE:9955) Has A Fair Chunk Of Debt

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.' 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 Super Dragon Technology Co., Ltd (TWSE:9955) makes use of debt. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. 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, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest 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 Super Dragon Technology

How Much Debt Does Super Dragon Technology Carry?

The chart below, which you can click on for greater detail, shows that Super Dragon Technology had NT$1.47b in debt in March 2024; about the same as the year before. However, because it has a cash reserve of NT$123.6m, its net debt is less, at about NT$1.34b.

How Strong Is Super Dragon Technology's Balance Sheet?

We can see from the most recent balance sheet that Super Dragon Technology had liabilities of NT$816.8m falling due within a year, and liabilities of NT$756.3m due beyond that. Offsetting these obligations, it had cash of NT$123.6m as well as receivables valued at NT$32.0m due within 12 months. So its liabilities total NT$1.42b more than the combination of its cash and short-term receivables.

While this might seem like a lot, it is not so bad since Super Dragon Technology has a market capitalization of NT$3.99b, and so it could probably strengthen its balance sheet by raising capital if it needed to. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Super Dragon Technology'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.

In the last year Super Dragon Technology wasn't profitable at an EBIT level, but managed to grow its revenue by 10%, to NT$1.2b. We usually like to see faster growth from unprofitable companies, but each to their own.

Caveat Emptor

Importantly, Super Dragon Technology had an earnings before interest and tax (EBIT) loss over the last year. Indeed, it lost NT$79m at the EBIT level. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. So we think its balance sheet is a little strained, though not beyond repair. For example, we would not want to see a repeat of last year's loss of NT$82m. So we do think this stock is quite risky. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. These risks can be hard to spot. Every company has them, and we've spotted 1 warning sign for Super Dragon Technology you should know about.

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.

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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.

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