Is Shih Her Technologies (GTSM:3551) A Risky Investment?

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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 Shih Her Technologies Inc. (GTSM:3551) does use debt in its business. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

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. Of course, plenty of companies use debt to fund growth, without any negative consequences. 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 Shih Her Technologies

What Is Shih Her Technologies's Debt?

The image below, which you can click on for greater detail, shows that Shih Her Technologies had debt of NT$490.6m at the end of December 2020, a reduction from NT$626.4m over a year. But on the other hand it also has NT$988.6m in cash, leading to a NT$498.0m net cash position.

A Look At Shih Her Technologies' Liabilities

We can see from the most recent balance sheet that Shih Her Technologies had liabilities of NT$626.8m falling due within a year, and liabilities of NT$531.5m due beyond that. Offsetting this, it had NT$988.6m in cash and NT$458.4m in receivables that were due within 12 months. So it actually has NT$288.7m more liquid assets than total liabilities.

This surplus suggests that Shih Her Technologies has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Simply put, the fact that Shih Her Technologies has more cash than debt is arguably a good indication that it can manage its debt safely.

In addition to that, we're happy to report that Shih Her Technologies has boosted its EBIT by 32%, thus reducing the spectre of future debt repayments. When analysing debt levels, the balance sheet is the obvious place to start. But it is Shih Her Technologies'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, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While Shih Her Technologies 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. During the last three years, Shih Her Technologies generated free cash flow amounting to a very robust 84% of its EBIT, more than we'd expect. That positions it well to pay down debt if desirable to do so.

Summing up

While it is always sensible to investigate a company's debt, in this case Shih Her Technologies has NT$498.0m in net cash and a decent-looking balance sheet. And it impressed us with free cash flow of NT$402m, being 84% of its EBIT. So is Shih Her Technologies'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. But ultimately, every company can contain risks that exist outside of the balance sheet. For example, we've discovered 1 warning sign for Shih Her Technologies that you should be aware of before investing here.

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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