ShunSin Technology Holdings (TPE:6451) Could Easily Take On More Debt

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. We note that ShunSin Technology Holdings Limited (TPE:6451) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

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 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, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for ShunSin Technology Holdings

What Is ShunSin Technology Holdings's Net Debt?

The image below, which you can click on for greater detail, shows that at September 2020 ShunSin Technology Holdings had debt of NT$4.86b, up from NT$3.95b in one year. But it also has NT$7.47b in cash to offset that, meaning it has NT$2.61b net cash.

How Strong Is ShunSin Technology Holdings's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that ShunSin Technology Holdings had liabilities of NT$5.78b due within 12 months and liabilities of NT$632.7m due beyond that. Offsetting this, it had NT$7.47b in cash and NT$1.20b in receivables that were due within 12 months. So it can boast NT$2.26b more liquid assets than total liabilities.

It's good to see that ShunSin Technology Holdings has plenty of liquidity on its balance sheet, suggesting conservative management of liabilities. Due to its strong net asset position, it is not likely to face issues with its lenders. Succinctly put, ShunSin Technology Holdings boasts net cash, so it's fair to say it does not have a heavy debt load!

In addition to that, we're happy to report that ShunSin Technology Holdings has boosted its EBIT by 49%, thus reducing the spectre of future debt repayments. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since ShunSin Technology Holdings 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.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. ShunSin Technology Holdings 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 two years, ShunSin Technology Holdings 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

While it is always sensible to investigate a company's debt, in this case ShunSin Technology Holdings has NT$2.61b in net cash and a decent-looking balance sheet. The cherry on top was that in converted 236% of that EBIT to free cash flow, bringing in NT$2.7b. The bottom line is that we do not find ShunSin Technology Holdings's debt levels at all concerning. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. Like risks, for instance. Every company has them, and we've spotted 4 warning signs for ShunSin Technology Holdings (of which 1 is a bit unpleasant!) you should know about.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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