Is Sinopower Semiconductor (GTSM:6435) A Risky Investment?

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that '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, Sinopower Semiconductor, Inc. (GTSM:6435) does carry debt. But should shareholders be worried about its use of debt?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for Sinopower Semiconductor

What Is Sinopower Semiconductor's Debt?

As you can see below, Sinopower Semiconductor had NT$55.0m of debt at September 2020, down from NT$157.0m a year prior. But on the other hand it also has NT$305.2m in cash, leading to a NT$250.2m net cash position.

A Look At Sinopower Semiconductor's Liabilities

Zooming in on the latest balance sheet data, we can see that Sinopower Semiconductor had liabilities of NT$526.5m due within 12 months and liabilities of NT$17.3m due beyond that. On the other hand, it had cash of NT$305.2m and NT$505.6m worth of receivables due within a year. So it can boast NT$266.9m more liquid assets than total liabilities.

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

In fact Sinopower Semiconductor's saving grace is its low debt levels, because its EBIT has tanked 23% in the last twelve months. Falling earnings (if the trend continues) could eventually make even modest debt quite risky. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Sinopower Semiconductor 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. Sinopower Semiconductor 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. During the last three years, Sinopower Semiconductor produced sturdy free cash flow equating to 70% of its EBIT, about what we'd expect. This free cash flow puts the company in a good position to pay down debt, when appropriate.

Summing up

While we empathize with investors who find debt concerning, you should keep in mind that Sinopower Semiconductor has net cash of NT$250.2m, as well as more liquid assets than liabilities. And it impressed us with free cash flow of NT$380m, being 70% of its EBIT. So we don't have any problem with Sinopower Semiconductor's use of debt. 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. To that end, you should be aware of the 1 warning sign we've spotted with Sinopower Semiconductor .

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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