SYN-TECH Chem. & Pharm (GTSM:1777) Could Easily Take On More Debt

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.' 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, SYN-TECH Chem. & Pharm. Co., Ltd. (GTSM:1777) does carry debt. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. 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. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for SYN-TECH Chem. & Pharm

What Is SYN-TECH Chem. & Pharm's Net Debt?

You can click the graphic below for the historical numbers, but it shows that SYN-TECH Chem. & Pharm had NT$280.0m of debt in December 2020, down from NT$447.8m, one year before. But on the other hand it also has NT$619.1m in cash, leading to a NT$339.1m net cash position.

How Strong Is SYN-TECH Chem. & Pharm's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that SYN-TECH Chem. & Pharm had liabilities of NT$462.8m due within 12 months and liabilities of NT$78.7m due beyond that. Offsetting these obligations, it had cash of NT$619.1m as well as receivables valued at NT$93.8m due within 12 months. So it can boast NT$171.4m more liquid assets than total liabilities.

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

In addition to that, we're happy to report that SYN-TECH Chem. & Pharm has boosted its EBIT by 31%, thus reducing the spectre of future debt repayments. The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine SYN-TECH Chem. & Pharm'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, a business needs free cash flow to pay off debt; accounting profits just don't cut it. While SYN-TECH Chem. & Pharm 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. During the last three years, SYN-TECH Chem. & Pharm generated free cash flow amounting to a very robust 88% of its EBIT, more than we'd expect. That puts it in a very strong position to pay down debt.

Summing up

While it is always sensible to investigate a company's debt, in this case SYN-TECH Chem. & Pharm has NT$339.1m in net cash and a decent-looking balance sheet. The cherry on top was that in converted 88% of that EBIT to free cash flow, bringing in NT$258m. So we don't think SYN-TECH Chem. & Pharm's use of debt is risky. 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. Case in point: We've spotted 2 warning signs for SYN-TECH Chem. & Pharm you should be aware of.

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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