Savior Lifetec (GTSM:4167) Seems To Use Debt Quite Sensibly

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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 Savior Lifetec Corporation (GTSM:4167) makes use of debt. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

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. If things get really bad, the lenders can take control of the business. 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. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for Savior Lifetec

What Is Savior Lifetec's Debt?

As you can see below, Savior Lifetec had NT$573.5m of debt at September 2020, down from NT$1.13b a year prior. But on the other hand it also has NT$913.6m in cash, leading to a NT$340.0m net cash position.

A Look At Savior Lifetec's Liabilities

The latest balance sheet data shows that Savior Lifetec had liabilities of NT$554.7m due within a year, and liabilities of NT$991.1m falling due after that. Offsetting these obligations, it had cash of NT$913.6m as well as receivables valued at NT$375.9m due within 12 months. So it has liabilities totalling NT$256.3m more than its cash and near-term receivables, combined.

Of course, Savior Lifetec has a market capitalization of NT$9.71b, so these liabilities are probably manageable. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. Despite its noteworthy liabilities, Savior Lifetec boasts net cash, so it's fair to say it does not have a heavy debt load!

It was also good to see that despite losing money on the EBIT line last year, Savior Lifetec turned things around in the last 12 months, delivering and EBIT of NT$188m. When analysing debt levels, the balance sheet is the obvious place to start. But it is Savior Lifetec'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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. Savior Lifetec 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 last year, Savior Lifetec reported free cash flow worth 18% of its EBIT, which is really quite low. That limp level of cash conversion undermines its ability to manage and pay down debt.

Summing up

While it is always sensible to look at a company's total liabilities, it is very reassuring that Savior Lifetec has NT$340.0m in net cash. So we are not troubled with Savior Lifetec's debt use. 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. Take risks, for example - Savior Lifetec has 1 warning sign we think 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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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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