Here's Why SYSAGE Technology (TPE:6112) Can Manage Its Debt Responsibly

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.' 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 can see that SYSAGE Technology Co., Ltd. (TPE:6112) does use debt in its business. But the real question is whether this debt is making the company risky.

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. 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. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

View our latest analysis for SYSAGE Technology

How Much Debt Does SYSAGE Technology Carry?

You can click the graphic below for the historical numbers, but it shows that as of December 2020 SYSAGE Technology had NT$740.5m of debt, an increase on NT$407.2m, over one year. But it also has NT$907.8m in cash to offset that, meaning it has NT$167.3m net cash.

How Healthy Is SYSAGE Technology's Balance Sheet?

According to the last reported balance sheet, SYSAGE Technology had liabilities of NT$3.15b due within 12 months, and liabilities of NT$454.2m due beyond 12 months. Offsetting this, it had NT$907.8m in cash and NT$1.93b in receivables that were due within 12 months. So its liabilities total NT$762.1m more than the combination of its cash and short-term receivables.

Since publicly traded SYSAGE Technology shares are worth a total of NT$8.31b, it seems unlikely that this level of liabilities would be a major threat. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. While it does have liabilities worth noting, SYSAGE Technology also has more cash than debt, so we're pretty confident it can manage its debt safely.

On top of that, SYSAGE Technology grew its EBIT by 39% over the last twelve months, and that growth will make it easier to handle its debt. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if SYSAGE Technology can strengthen its balance sheet over time. 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 company can only pay off debt with cold hard cash, not accounting profits. SYSAGE Technology 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. In the last three years, SYSAGE Technology basically broke even on a free cash flow basis. While many companies do operate at break-even, we prefer see substantial free cash flow, especially if a it already has dead.

Summing up

We could understand if investors are concerned about SYSAGE Technology's liabilities, but we can be reassured by the fact it has has net cash of NT$167.3m. And it impressed us with its EBIT growth of 39% over the last year. So we don't have any problem with SYSAGE Technology's use of debt. 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. Case in point: We've spotted 1 warning sign for SYSAGE Technology you should be aware of.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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