David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. We note that Systex Corporation (TPE:6214) does have debt on its balance sheet. 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 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.
Check out our latest analysis for Systex
What Is Systex's Debt?
As you can see below, Systex had NT$1.34b of debt, at September 2020, which is about the same as the year before. You can click the chart for greater detail. However, it does have NT$5.30b in cash offsetting this, leading to net cash of NT$3.96b.
How Healthy Is Systex's Balance Sheet?
We can see from the most recent balance sheet that Systex had liabilities of NT$7.10b falling due within a year, and liabilities of NT$542.8m due beyond that. Offsetting these obligations, it had cash of NT$5.30b as well as receivables valued at NT$4.05b due within 12 months. So it can boast NT$1.70b more liquid assets than total liabilities.
This short term liquidity is a sign that Systex could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, Systex boasts net cash, so it's fair to say it does not have a heavy debt load!
On the other hand, Systex's EBIT dived 18%, over the last year. If that rate of decline in earnings continues, the company could find itself in a tight spot. When analysing debt levels, the balance sheet is the obvious place to start. But it is Systex's earnings that will influence how the balance sheet holds up in the future. 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.
But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. Systex 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, Systex recorded free cash flow worth a fulsome 92% of its EBIT, which is stronger than we'd usually expect. That puts it in a very strong position to pay down debt.
Summing up
While we empathize with investors who find debt concerning, you should keep in mind that Systex has net cash of NT$3.96b, as well as more liquid assets than liabilities. And it impressed us with free cash flow of NT$1.2b, being 92% of its EBIT. So we don't have any problem with Systex's use of debt. 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, we've discovered 2 warning signs for Systex that you should be aware of before investing here.
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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About TWSE:6214
Systex
Provides various IT services for enterprise and government clients in Taiwan and Asia.
Adequate balance sheet average dividend payer.
