Syscom Computer Engineering (TPE:2453) Could Easily Take On More 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 Syscom Computer Engineering Co. (TPE:2453) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. 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 step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for Syscom Computer Engineering

What Is Syscom Computer Engineering's Net Debt?

As you can see below, Syscom Computer Engineering had NT$115.6m of debt at December 2020, down from NT$485.1m a year prior. But on the other hand it also has NT$903.7m in cash, leading to a NT$788.1m net cash position.

A Look At Syscom Computer Engineering's Liabilities

According to the last reported balance sheet, Syscom Computer Engineering had liabilities of NT$2.22b due within 12 months, and liabilities of NT$179.2m due beyond 12 months. On the other hand, it had cash of NT$903.7m and NT$1.71b worth of receivables due within a year. So it can boast NT$220.7m more liquid assets than total liabilities.

This short term liquidity is a sign that Syscom Computer Engineering could probably pay off its debt with ease, as its balance sheet is far from stretched. Simply put, the fact that Syscom Computer Engineering has more cash than debt is arguably a good indication that it can manage its debt safely.

On top of that, Syscom Computer Engineering grew its EBIT by 63% over the last twelve months, and that growth will make it easier to handle its debt. The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since Syscom Computer Engineering 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.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While Syscom Computer Engineering 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, Syscom Computer Engineering actually produced more free cash flow than EBIT over the last three years. 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 it is always sensible to investigate a company's debt, in this case Syscom Computer Engineering has NT$788.1m in net cash and a decent-looking balance sheet. The cherry on top was that in converted 209% of that EBIT to free cash flow, bringing in NT$511m. So is Syscom Computer Engineering's debt a risk? It doesn't seem so to us. 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. To that end, you should be aware of the 3 warning signs we've spotted with Syscom Computer Engineering .

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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