We Think Silergy (TWSE:6415) Can Stay On Top Of Its Debt

Legendary fund manager Li Lu (who Charlie Munger backed) once said, '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. Importantly, Silergy Corp. (TWSE:6415) does carry debt. But is this debt a concern to shareholders?

When Is Debt Dangerous?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. 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. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for Silergy

What Is Silergy's Debt?

As you can see below, at the end of September 2023, Silergy had NT$53.9m of debt, up from none a year ago. Click the image for more detail. However, it does have NT$18.4b in cash offsetting this, leading to net cash of NT$18.3b.

How Healthy Is Silergy's Balance Sheet?

We can see from the most recent balance sheet that Silergy had liabilities of NT$1.69b falling due within a year, and liabilities of NT$1.41b due beyond that. Offsetting this, it had NT$18.4b in cash and NT$1.85b in receivables that were due within 12 months. So it can boast NT$17.1b more liquid assets than total liabilities.

This short term liquidity is a sign that Silergy could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, Silergy boasts net cash, so it's fair to say it does not have a heavy debt load!

The modesty of its debt load may become crucial for Silergy if management cannot prevent a repeat of the 98% cut to EBIT over the last year. When a company sees its earnings tank, it can sometimes find its relationships with its lenders turn sour. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine Silergy'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. Silergy 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 three years, Silergy actually produced more free cash flow than EBIT. That sort of strong cash conversion gets us as excited as the crowd when the beat drops at a Daft Punk concert.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Silergy has net cash of NT$18.3b, as well as more liquid assets than liabilities. And it impressed us with free cash flow of NT$3.2b, being 122% of its EBIT. So we are not troubled with Silergy's debt use. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. For example - Silergy has 3 warning signs we think you should be aware of.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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.