ShunSin Technology Holdings (TPE:6451) Seems To Use Debt Rather Sparingly

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. As with many other companies ShunSin Technology Holdings Limited (TPE:6451) makes use of debt. But the more important question is: how much risk is that debt creating?

When Is Debt Dangerous?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for ShunSin Technology Holdings

What Is ShunSin Technology Holdings's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of September 2020 ShunSin Technology Holdings had NT$4.86b of debt, an increase on NT$3.95b, over one year. But it also has NT$7.47b in cash to offset that, meaning it has NT$2.61b net cash.

How Healthy Is ShunSin Technology Holdings' Balance Sheet?

We can see from the most recent balance sheet that ShunSin Technology Holdings had liabilities of NT$5.78b falling due within a year, and liabilities of NT$632.7m due beyond that. Offsetting these obligations, it had cash of NT$7.47b as well as receivables valued at NT$1.20b due within 12 months. So it actually has 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. Simply put, the fact that ShunSin Technology Holdings has more cash than debt is arguably a good indication that it can manage its debt safely.

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 it is ShunSin Technology Holdings's earnings that will influence how the balance sheet holds up in the future. 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, a business needs free cash flow to pay off debt; accounting profits just don't cut it. While ShunSin Technology Holdings 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, ShunSin Technology Holdings actually produced more free cash flow than EBIT over the last two years. 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. And it impressed us with free cash flow of NT$2.7b, being 236% of its EBIT. The bottom line is that we do not find ShunSin Technology Holdings's debt levels at all concerning. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. Be aware that ShunSin Technology Holdings is showing 4 warning signs in our investment analysis , and 1 of those doesn't sit too well with us...

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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