Is Shian Yih Electronic IndustryLtd (GTSM:3531) A Risky Investment?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. We can see that Shian Yih Electronic Industry Co.,Ltd (GTSM:3531) does use debt in its business. But should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. If things get really bad, the lenders can take control of the business. 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. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

View our latest analysis for Shian Yih Electronic IndustryLtd

What Is Shian Yih Electronic IndustryLtd's Net Debt?

As you can see below, at the end of September 2020, Shian Yih Electronic IndustryLtd had NT$271.7m of debt, up from NT$31.0m a year ago. Click the image for more detail. But on the other hand it also has NT$903.1m in cash, leading to a NT$631.4m net cash position.

How Healthy Is Shian Yih Electronic IndustryLtd's Balance Sheet?

According to the last reported balance sheet, Shian Yih Electronic IndustryLtd had liabilities of NT$565.4m due within 12 months, and liabilities of NT$196.4m due beyond 12 months. 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 can boast NT$570.8m more liquid assets than total liabilities.

This surplus strongly suggests that Shian Yih Electronic IndustryLtd has a rock-solid balance sheet (and the debt is of no concern whatsoever). On this view, lenders should feel as safe as the beloved of a black-belt karate master. Succinctly put, Shian Yih Electronic IndustryLtd boasts net cash, so it's fair to say it does not have a heavy debt load!

The modesty of its debt load may become crucial for Shian Yih Electronic IndustryLtd if management cannot prevent a repeat of the 22% cut to EBIT 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 when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

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. Happily for any shareholders, Shian Yih Electronic IndustryLtd actually produced more free cash flow than EBIT over the last three years. That sort of strong cash conversion gets us as excited as the crowd when the beat drops at a Daft Punk concert.

Summing up

While it is always sensible to investigate a company's debt, in this case Shian Yih Electronic IndustryLtd has NT$631.4m in net cash and a decent-looking balance sheet. And it impressed us with free cash flow of NT$94m, being 118% of its EBIT. So is Shian Yih Electronic IndustryLtd's debt a risk? It doesn't seem so to us. 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. Consider risks, for instance. Every company has them, and we've spotted 3 warning signs for Shian Yih Electronic IndustryLtd you should know about.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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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