Health Check: How Prudently Does SynCore BiotechnologyLtd (GTSM:4192) Use Debt?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. We note that SynCore Biotechnology Co.,Ltd (GTSM:4192) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

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 usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for SynCore BiotechnologyLtd

What Is SynCore BiotechnologyLtd's Net Debt?

As you can see below, at the end of September 2020, SynCore BiotechnologyLtd had NT$210.0m of debt, up from NT$30.0m a year ago. Click the image for more detail. However, its balance sheet shows it holds NT$624.1m in cash, so it actually has NT$414.1m net cash.

How Healthy Is SynCore BiotechnologyLtd's Balance Sheet?

The latest balance sheet data shows that SynCore BiotechnologyLtd had liabilities of NT$331.8m due within a year, and liabilities of NT$8.61m falling due after that. Offsetting these obligations, it had cash of NT$624.1m as well as receivables valued at NT$27.2m due within 12 months. So it actually has NT$310.9m more liquid assets than total liabilities.

This short term liquidity is a sign that SynCore BiotechnologyLtd could probably pay off its debt with ease, as its balance sheet is far from stretched. Simply put, the fact that SynCore BiotechnologyLtd has more cash than debt is arguably a good indication that it can manage its debt safely. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since SynCore BiotechnologyLtd will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Over 12 months, SynCore BiotechnologyLtd made a loss at the EBIT level, and saw its revenue drop to NT$9.8m, which is a fall of 23%. That makes us nervous, to say the least.

So How Risky Is SynCore BiotechnologyLtd?

By their very nature companies that are losing money are more risky than those with a long history of profitability. And the fact is that over the last twelve months SynCore BiotechnologyLtd lost money at the earnings before interest and tax (EBIT) line. And over the same period it saw negative free cash outflow of NT$399m and booked a NT$409m accounting loss. However, it has net cash of NT$414.1m, so it has a bit of time before it will need more capital. Overall, its balance sheet doesn't seem overly risky, at the moment, but we're always cautious until we see the positive free cash flow. 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. For example, we've discovered 3 warning signs for SynCore BiotechnologyLtd (2 can't be ignored!) that you should be aware of before investing here.

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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