Does Shian Yih Electronic IndustryLtd (GTSM:3531) Have A Healthy Balance Sheet?

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. Importantly, Shian Yih Electronic Industry Co.,Ltd (GTSM:3531) does carry debt. But the more important question is: how much risk is that debt creating?

What Risk Does Debt Bring?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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, 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.

Check out our latest analysis for Shian Yih Electronic IndustryLtd

How Much Debt Does Shian Yih Electronic IndustryLtd Carry?

You can click the graphic below for the historical numbers, but it shows that as of September 2020 Shian Yih Electronic IndustryLtd had NT$271.7m of debt, an increase on NT$31.0m, over one year. But on the other hand it also has NT$903.1m in cash, leading to a NT$631.4m net cash position.

A Look At Shian Yih Electronic IndustryLtd's Liabilities

We can see from the most recent balance sheet that Shian Yih Electronic IndustryLtd had liabilities of NT$565.4m falling due within a year, and liabilities of NT$196.4m due beyond that. Offsetting these obligations, it had cash of NT$903.1m as well as receivables valued at NT$429.5m due within 12 months. So it actually has NT$570.8m more liquid assets than total liabilities.

This excess liquidity is a great indication that Shian Yih Electronic IndustryLtd's balance sheet is almost as strong as Fort Knox. On this view, lenders should feel as safe as the beloved of a black-belt karate master. Simply put, the fact that Shian Yih Electronic IndustryLtd has more cash than debt is arguably a good indication that it can manage its debt safely.

It is just as well that Shian Yih Electronic IndustryLtd's load is not too heavy, because its EBIT was down 22% over the last year. When a company sees its earnings tank, it can sometimes find its relationships with its lenders turn sour. When analysing debt levels, the balance sheet is the obvious place to start. But it is Shian Yih Electronic IndustryLtd'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.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. Shian Yih Electronic IndustryLtd 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, Shian Yih Electronic IndustryLtd actually produced more free cash flow than EBIT. There's nothing better than incoming cash when it comes to staying in your lenders' good graces.

Summing up

While we empathize with investors who find debt concerning, you should keep in mind that Shian Yih Electronic IndustryLtd has net cash of NT$631.4m, as well as more liquid assets than liabilities. The cherry on top was that in converted 118% of that EBIT to free cash flow, bringing in NT$94m. So is Shian Yih Electronic IndustryLtd's debt a risk? It doesn't seem so to us. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. For example - Shian Yih Electronic IndustryLtd has 3 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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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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