SYN-TECH Chem. & Pharm (GTSM:1777) Seems To Use Debt Rather Sparingly

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.' 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 the more important question is: how much risk is that debt creating?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, together.

See 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$301.9m of debt in September 2020, down from NT$439.2m, one year before. But on the other hand it also has NT$527.8m in cash, leading to a NT$225.9m net cash position.

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

We can see from the most recent balance sheet that SYN-TECH Chem. & Pharm had liabilities of NT$471.9m falling due within a year, and liabilities of NT$81.0m due beyond that. Offsetting these obligations, it had cash of NT$527.8m as well as receivables valued at NT$134.5m due within 12 months. So it actually has NT$109.3m more liquid assets than total liabilities.

This surplus suggests that SYN-TECH Chem. & Pharm has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Simply put, the fact that SYN-TECH Chem. & Pharm has more cash than debt is arguably a good indication that it can manage its debt safely.

In addition to that, we're happy to report that SYN-TECH Chem. & Pharm has boosted its EBIT by 45%, thus reducing the spectre of future debt repayments. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if SYN-TECH Chem. & Pharm can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. SYN-TECH Chem. & Pharm 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. Over the most recent three years, SYN-TECH Chem. & Pharm recorded free cash flow worth 64% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This free cash flow puts the company in a good position to pay down debt, when appropriate.

Summing up

While it is always sensible to investigate a company's debt, in this case SYN-TECH Chem. & Pharm has NT$225.9m in net cash and a decent-looking balance sheet. And we liked the look of last year's 45% year-on-year EBIT growth. 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. However, not all investment risk resides within the balance sheet - far from it. Take risks, for example - SYN-TECH Chem. & Pharm has 2 warning signs we think you should be aware of.

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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