Does Spirox (TPE:3055) Have A Healthy Balance Sheet?

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.' 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. Importantly, Spirox Corporation (TPE:3055) does carry debt. But is this debt a concern to shareholders?

When Is Debt Dangerous?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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 Spirox

How Much Debt Does Spirox Carry?

As you can see below, at the end of December 2020, Spirox had NT$2.35b of debt, up from NT$1.62b a year ago. Click the image for more detail. However, it also had NT$1.13b in cash, and so its net debt is NT$1.22b.

How Healthy Is Spirox's Balance Sheet?

We can see from the most recent balance sheet that Spirox had liabilities of NT$3.24b falling due within a year, and liabilities of NT$577.0m due beyond that. On the other hand, it had cash of NT$1.13b and NT$2.26b worth of receivables due within a year. So its liabilities total NT$423.4m more than the combination of its cash and short-term receivables.

Given Spirox has a market capitalization of NT$3.39b, it's hard to believe these liabilities pose much threat. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. When analysing debt levels, the balance sheet is the obvious place to start. But it is Spirox'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.

Over 12 months, Spirox reported revenue of NT$3.7b, which is a gain of 27%, although it did not report any earnings before interest and tax. Shareholders probably have their fingers crossed that it can grow its way to profits.

Caveat Emptor

While we can certainly appreciate Spirox's revenue growth, its earnings before interest and tax (EBIT) loss is not ideal. Indeed, it lost NT$106m at the EBIT level. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. However, it doesn't help that it burned through NT$886m of cash over the last year. So suffice it to say we consider the stock very risky. 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. We've identified 2 warning signs with Spirox , and understanding them should be part of your investment process.

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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