Does Sentronic International (GTSM:3232) Have A Healthy 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.' 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. As with many other companies Sentronic International Corp. (GTSM:3232) makes use of debt. But the real question is whether this debt is making the company risky.

What Risk Does Debt Bring?

Debt assists a business until the business has trouble paying it off, either with new capital or with free 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. 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.

Check out our latest analysis for Sentronic International

How Much Debt Does Sentronic International Carry?

The image below, which you can click on for greater detail, shows that Sentronic International had debt of NT$145.9m at the end of September 2020, a reduction from NT$172.4m over a year. However, its balance sheet shows it holds NT$147.7m in cash, so it actually has NT$1.79m net cash.

How Healthy Is Sentronic International's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Sentronic International had liabilities of NT$173.9m due within 12 months and liabilities of NT$128.6m due beyond that. On the other hand, it had cash of NT$147.7m and NT$181.3m worth of receivables due within a year. So it actually has NT$26.5m more liquid assets than total liabilities.

This surplus suggests that Sentronic International has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Simply put, the fact that Sentronic International has more cash than debt is arguably a good indication that it can manage its debt safely.

Notably Sentronic International's EBIT was pretty flat over the last year. We would prefer to see some earnings growth, because that always helps diminish debt. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Sentronic International 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. Sentronic International 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. During the last three years, Sentronic International burned a lot of cash. While investors are no doubt expecting a reversal of that situation in due course, it clearly does mean its use of debt is more risky.

Summing up

While it is always sensible to investigate a company's debt, in this case Sentronic International has NT$1.79m in net cash and a decent-looking balance sheet. So we are not troubled with Sentronic International's debt use. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. Case in point: We've spotted 2 warning signs for Sentronic International you should be aware of.

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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