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. Importantly, Skytech Inc. (TWSE:6937) does carry debt. But is this debt a concern to shareholders?
Why Does Debt Bring Risk?
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 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, plenty of companies use debt to fund growth, without any negative consequences. When we examine debt levels, we first consider both cash and debt levels, together.
See our latest analysis for Skytech
What Is Skytech's Debt?
You can click the graphic below for the historical numbers, but it shows that Skytech had NT$251.7m of debt in March 2024, down from NT$371.0m, one year before. But it also has NT$994.0m in cash to offset that, meaning it has NT$742.3m net cash.
A Look At Skytech's Liabilities
We can see from the most recent balance sheet that Skytech had liabilities of NT$623.8m falling due within a year, and liabilities of NT$268.0m due beyond that. Offsetting this, it had NT$994.0m in cash and NT$548.0m in receivables that were due within 12 months. So it can boast NT$650.1m more liquid assets than total liabilities.
This surplus suggests that Skytech has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, Skytech boasts net cash, so it's fair to say it does not have a heavy debt load!
Fortunately, Skytech grew its EBIT by 9.7% in the last year, making that debt load look even more manageable. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Skytech will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.
Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While Skytech 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. Over the last three years, Skytech recorded negative free cash flow, in total. Debt is far more risky for companies with unreliable free cash flow, so shareholders should be hoping that the past expenditure will produce free cash flow in the future.
Summing Up
While it is always sensible to investigate a company's debt, in this case Skytech has NT$742.3m in net cash and a decent-looking balance sheet. On top of that, it increased its EBIT by 9.7% in the last twelve months. So we don't have any problem with Skytech's use of debt. 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. To that end, you should learn about the 3 warning signs we've spotted with Skytech (including 1 which is a bit unpleasant) .
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.
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About TWSE:6937
Excellent balance sheet with proven track record.
