Syscom Computer Engineering (TPE:2453) Has A Rock Solid Balance Sheet

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that '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. Importantly, Syscom Computer Engineering Co. (TPE:2453) does carry debt. But the more important question is: how much risk is that debt creating?

When Is Debt Dangerous?

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. 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 think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for Syscom Computer Engineering

How Much Debt Does Syscom Computer Engineering Carry?

You can click the graphic below for the historical numbers, but it shows that Syscom Computer Engineering had NT$616.1m of debt in September 2020, down from NT$1.03b, one year before. But it also has NT$813.7m in cash to offset that, meaning it has NT$197.6m net cash.

How Healthy Is Syscom Computer Engineering's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Syscom Computer Engineering had liabilities of NT$2.18b due within 12 months and liabilities of NT$176.3m due beyond that. Offsetting this, it had NT$813.7m in cash and NT$1.61b in receivables that were due within 12 months. So it can boast NT$70.4m more liquid assets than total liabilities.

This surplus suggests that Syscom Computer Engineering has a conservative balance sheet, and could probably eliminate its debt without much difficulty. 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 68% 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, a business needs free cash flow to pay off debt; accounting profits just don't cut it. 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 we empathize with investors who find debt concerning, you should keep in mind that Syscom Computer Engineering has net cash of NT$197.6m, as well as more liquid assets than liabilities. And it impressed us with free cash flow of NT$769m, being 218% of its EBIT. So is Syscom Computer Engineering's debt a risk? It doesn't seem so to us. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. Consider for instance, the ever-present spectre of investment risk. We've identified 2 warning signs with Syscom Computer Engineering , and understanding them should be part of your investment process.

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. 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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