Systex (TPE:6214) Seems To Use Debt Rather Sparingly

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. As with many other companies Systex Corporation (TPE:6214) makes use of debt. But is this debt a concern to shareholders?

When Is Debt Dangerous?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. 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. 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 Systex

What Is Systex's Debt?

As you can see below, at the end of December 2020, Systex had NT$897.4m of debt, up from NT$527.3m a year ago. Click the image for more detail. However, its balance sheet shows it holds NT$6.83b in cash, so it actually has NT$5.94b net cash.

A Look At Systex's Liabilities

Zooming in on the latest balance sheet data, we can see that Systex had liabilities of NT$7.84b due within 12 months and liabilities of NT$536.8m due beyond that. On the other hand, it had cash of NT$6.83b and NT$3.82b worth of receivables due within a year. So it can boast NT$2.27b 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!

In addition to that, we're happy to report that Systex has boosted its EBIT by 52%, thus reducing the spectre of future debt repayments. There's no doubt that we learn most about debt from the balance sheet. But it is Systex's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. While Systex 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, Systex 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 Systex has NT$5.94b in net cash and a decent-looking balance sheet. And it impressed us with free cash flow of NT$949m, being 118% of its EBIT. So we don't think Systex's use of debt is risky. 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 2 warning signs we've spotted with Systex .

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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