Syngen Biotech (GTSM:8279) Seems To Use Debt Quite Sensibly

Warren Buffett famously said, '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 Syngen Biotech Co., Ltd. (GTSM:8279) makes use of debt. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

Debt assists a business until the business has trouble paying it off, either with new capital or with free 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, 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.

View our latest analysis for Syngen Biotech

What Is Syngen Biotech's Net Debt?

You can click the graphic below for the historical numbers, but it shows that Syngen Biotech had NT$100.0m of debt in September 2020, down from NT$208.5m, one year before. However, its balance sheet shows it holds NT$343.2m in cash, so it actually has NT$243.2m net cash.

How Strong Is Syngen Biotech's Balance Sheet?

According to the last reported balance sheet, Syngen Biotech had liabilities of NT$367.5m due within 12 months, and liabilities of NT$192.6m due beyond 12 months. Offsetting this, it had NT$343.2m in cash and NT$349.8m in receivables that were due within 12 months. So it actually has NT$133.0m more liquid assets than total liabilities.

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

Also positive, Syngen Biotech grew its EBIT by 23% in the last year, and that should make it easier to pay down debt, going forward. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Syngen Biotech's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. Syngen Biotech 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 three years, Syngen Biotech recorded negative free cash flow, in total. Debt is usually more expensive, and almost always more risky in the hands of a company with negative free cash flow. Shareholders ought to hope for an improvement.

Summing up

While we empathize with investors who find debt concerning, you should keep in mind that Syngen Biotech has net cash of NT$243.2m, as well as more liquid assets than liabilities. And it impressed us with its EBIT growth of 23% over the last year. So we don't have any problem with Syngen Biotech's use of debt. 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 Syngen Biotech you should be aware of, and 1 of them makes us a bit uncomfortable.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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