Warren Buffett famously said, '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. We note that Spirox Corporation (TPE:3055) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.
Why Does Debt Bring Risk?
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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. 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?
The image below, which you can click on for greater detail, shows that at September 2020 Spirox had debt of NT$1.67b, up from NT$692.6m in one year. However, it does have NT$1.24b in cash offsetting this, leading to net debt of about NT$434.4m.
How Healthy Is Spirox's Balance Sheet?
According to the last reported balance sheet, Spirox had liabilities of NT$2.32b due within 12 months, and liabilities of NT$207.3m due beyond 12 months. Offsetting this, it had NT$1.24b in cash and NT$1.54b in receivables that were due within 12 months. So it can boast NT$251.7m more liquid assets than total liabilities.
This surplus suggests that Spirox has a conservative balance sheet, and could probably eliminate its debt without much difficulty. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Spirox 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.
Over 12 months, Spirox reported revenue of NT$3.6b, which is a gain of 48%, 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
Even though Spirox managed to grow its top line quite deftly, the cold hard truth is that it is losing money on the EBIT line. Indeed, it lost NT$36m at the EBIT level. Looking on the brighter side, the business has adequate liquid assets, which give it time to grow and develop before its debt becomes a near-term issue. But we'd want to see some positive free cashflow before spending much time on trying to understand the stock. This one is a bit too risky for our liking. 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. Be aware that Spirox is showing 3 warning signs in our investment analysis , you should know about...
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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About TWSE:3055
Spirox
Engages in the provision of integrated solutions to the semiconductor and FPD industries in Taiwan, China, and internationally.
Adequate balance sheet with concerning outlook.
