We Think ScinoPharm Taiwan (TPE:1789) Can Manage Its Debt With Ease

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 seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. As with many other companies ScinoPharm Taiwan, Ltd. (TPE:1789) makes use of debt. But is this debt a concern to shareholders?

When Is Debt Dangerous?

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. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. 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.

See our latest analysis for ScinoPharm Taiwan

How Much Debt Does ScinoPharm Taiwan Carry?

You can click the graphic below for the historical numbers, but it shows that ScinoPharm Taiwan had NT$243.7m of debt in September 2020, down from NT$270.7m, one year before. However, its balance sheet shows it holds NT$4.02b in cash, so it actually has NT$3.77b net cash.

How Strong Is ScinoPharm Taiwan's Balance Sheet?

We can see from the most recent balance sheet that ScinoPharm Taiwan had liabilities of NT$881.6m falling due within a year, and liabilities of NT$633.4m due beyond that. Offsetting these obligations, it had cash of NT$4.02b as well as receivables valued at NT$556.8m due within 12 months. So it actually has NT$3.06b more liquid assets than total liabilities.

This surplus suggests that ScinoPharm Taiwan has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, ScinoPharm Taiwan boasts net cash, so it's fair to say it does not have a heavy debt load!

Also good is that ScinoPharm Taiwan grew its EBIT at 13% over the last year, further increasing its ability to manage debt. 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 ScinoPharm Taiwan'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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. While ScinoPharm Taiwan 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. Happily for any shareholders, ScinoPharm Taiwan actually produced more free cash flow than EBIT over the last three years. That sort of strong cash generation warms our hearts like a puppy in a bumblebee suit.

Summing up

While we empathize with investors who find debt concerning, you should keep in mind that ScinoPharm Taiwan has net cash of NT$3.77b, as well as more liquid assets than liabilities. The cherry on top was that in converted 191% of that EBIT to free cash flow, bringing in NT$610m. So is ScinoPharm Taiwan's debt a risk? It doesn't seem so to us. Over time, share prices tend to follow earnings per share, so if you're interested in ScinoPharm Taiwan, you may well want to click here to check an interactive graph of its earnings per share history.

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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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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