Is Spirox (TWSE:3055) Using Too Much Debt?

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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. We note that Spirox Corporation (TWSE:3055) does have debt on its balance sheet. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for Spirox

What Is Spirox's Net Debt?

As you can see below, Spirox had NT$408.5m of debt at December 2023, down from NT$458.8m a year prior. However, it does have NT$2.19b in cash offsetting this, leading to net cash of NT$1.78b.

A Look At Spirox's Liabilities

We can see from the most recent balance sheet that Spirox had liabilities of NT$800.5m falling due within a year, and liabilities of NT$226.7m due beyond that. Offsetting these obligations, it had cash of NT$2.19b as well as receivables valued at NT$391.1m due within 12 months. So it actually has NT$1.55b more liquid assets than total liabilities.

This surplus suggests that Spirox is using debt in a way that is appears to be both safe and conservative. Given it has easily adequate short term liquidity, we don't think it will have any issues with its lenders. Succinctly put, Spirox boasts net cash, so it's fair to say it does not have a heavy debt load! 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.

In the last year Spirox had a loss before interest and tax, and actually shrunk its revenue by 30%, to NT$1.3b. To be frank that doesn't bode well.

So How Risky Is Spirox?

While Spirox lost money on an earnings before interest and tax (EBIT) level, it actually generated positive free cash flow NT$114m. So although it is loss-making, it doesn't seem to have too much near-term balance sheet risk, keeping in mind the net cash. We'll feel more comfortable with the stock once EBIT is positive, given the lacklustre revenue growth. 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. For example - Spirox has 1 warning sign we think you should be aware of.

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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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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.