Is Sitronix Technology (TPE:8016) Using Too Much 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 Sitronix Technology Corporation (TPE:8016) does have debt on its balance sheet. But is this debt a concern to shareholders?

When Is Debt Dangerous?

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. 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, debt can be an important tool in businesses, particularly capital heavy businesses. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

View our latest analysis for Sitronix Technology

What Is Sitronix Technology's Debt?

The image below, which you can click on for greater detail, shows that at September 2020 Sitronix Technology had debt of NT$339.5m, up from NT$216.2m in one year. But on the other hand it also has NT$7.40b in cash, leading to a NT$7.06b net cash position.

A Look At Sitronix Technology's Liabilities

We can see from the most recent balance sheet that Sitronix Technology had liabilities of NT$3.61b falling due within a year, and liabilities of NT$274.7m due beyond that. Offsetting these obligations, it had cash of NT$7.40b as well as receivables valued at NT$1.37b due within 12 months. So it actually has NT$4.88b more liquid assets than total liabilities.

This excess liquidity suggests that Sitronix Technology is taking a careful approach to debt. Because it has plenty of assets, it is unlikely to have trouble with its lenders. Simply put, the fact that Sitronix Technology has more cash than debt is arguably a good indication that it can manage its debt safely.

And we also note warmly that Sitronix Technology grew its EBIT by 14% last year, making its debt load easier to handle. The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine Sitronix Technology's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. While Sitronix Technology 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, Sitronix Technology actually produced more free cash flow than EBIT over the last three years. That sort of strong cash generation warms our hearts like a puppy in a bumblebee suit.

Summing up

While we empathize with investors who find debt concerning, you should keep in mind that Sitronix Technology has net cash of NT$7.06b, as well as more liquid assets than liabilities. The cherry on top was that in converted 105% of that EBIT to free cash flow, bringing in NT$1.8b. So we don't think Sitronix Technology's use of debt is risky. Given Sitronix Technology has a strong balance sheet is profitable and pays a dividend, it would be good to know how fast its dividends are growing, if at all. You can find out instantly by clicking this link.

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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