David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' 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. We note that San Lien Technology Corp. (GTSM:5493) does have debt on its balance sheet. But is this debt a concern to shareholders?
When Is Debt A Problem?
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. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. 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.
See our latest analysis for San Lien Technology
What Is San Lien Technology's Debt?
As you can see below, at the end of December 2020, San Lien Technology had NT$475.7m of debt, up from NT$450.2m a year ago. Click the image for more detail. But on the other hand it also has NT$629.7m in cash, leading to a NT$154.0m net cash position.
How Strong Is San Lien Technology's Balance Sheet?
According to the last reported balance sheet, San Lien Technology had liabilities of NT$1.28b due within 12 months, and liabilities of NT$183.8m due beyond 12 months. Offsetting these obligations, it had cash of NT$629.7m as well as receivables valued at NT$702.7m due within 12 months. So its liabilities total NT$126.9m more than the combination of its cash and short-term receivables.
Since publicly traded San Lien Technology shares are worth a total of NT$1.67b, it seems unlikely that this level of liabilities would be a major threat. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. Despite its noteworthy liabilities, San Lien Technology boasts net cash, so it's fair to say it does not have a heavy debt load!
Also positive, San Lien Technology grew its EBIT by 24% in the last year, and that should make it easier to pay down debt, going forward. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since San Lien Technology will need earnings to service that debt. 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.
But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. While San Lien Technology 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, San Lien Technology 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
We could understand if investors are concerned about San Lien Technology's liabilities, but we can be reassured by the fact it has has net cash of NT$154.0m. The cherry on top was that in converted 127% of that EBIT to free cash flow, bringing in NT$312m. So is San Lien Technology'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. But ultimately, every company can contain risks that exist outside of the balance sheet. For instance, we've identified 3 warning signs for San Lien Technology that you should be aware of.
If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.
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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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About TPEX:5493
Sanlien Technology
Manufactures and sells specialty chemical for the semiconductor industry in Taiwan, Asia, and internationally.
Flawless balance sheet, good value and pays a dividend.
