Is Sino-American Silicon Products (GTSM:5483) 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.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. We can see that Sino-American Silicon Products Inc. (GTSM:5483) does use debt in its business. But the more important question is: how much risk is that debt creating?

When Is Debt Dangerous?

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. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

Check out our latest analysis for Sino-American Silicon Products

What Is Sino-American Silicon Products's Debt?

As you can see below, at the end of September 2020, Sino-American Silicon Products had NT$16.2b of debt, up from NT$12.2b a year ago. Click the image for more detail. But it also has NT$34.2b in cash to offset that, meaning it has NT$18.0b net cash.

A Look At Sino-American Silicon Products' Liabilities

The latest balance sheet data shows that Sino-American Silicon Products had liabilities of NT$32.8b due within a year, and liabilities of NT$28.0b falling due after that. On the other hand, it had cash of NT$34.2b and NT$8.72b worth of receivables due within a year. So its liabilities total NT$17.9b more than the combination of its cash and short-term receivables.

Since publicly traded Sino-American Silicon Products shares are worth a total of NT$100.2b, it seems unlikely that this level of liabilities would be a major threat. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. While it does have liabilities worth noting, Sino-American Silicon Products also has more cash than debt, so we're pretty confident it can manage its debt safely.

And we also note warmly that Sino-American Silicon Products grew its EBIT by 12% last year, making its debt load easier to handle. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if Sino-American Silicon Products can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. Sino-American Silicon Products 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, Sino-American Silicon Products 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

Although Sino-American Silicon Products's balance sheet isn't particularly strong, due to the total liabilities, it is clearly positive to see that it has net cash of NT$18.0b. The cherry on top was that in converted 116% of that EBIT to free cash flow, bringing in NT$2.8b. So is Sino-American Silicon Products'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. Take risks, for example - Sino-American Silicon Products has 2 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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