Is Sunflex Tech (GTSM:3390) A Risky Investment?

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.' 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. We can see that Sunflex Tech Co., Ltd. (GTSM:3390) does use debt in its business. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for Sunflex Tech

What Is Sunflex Tech's Debt?

As you can see below, at the end of September 2020, Sunflex Tech had NT$614.0m of debt, up from NT$540.0m a year ago. Click the image for more detail. However, its balance sheet shows it holds NT$1.10b in cash, so it actually has NT$481.9m net cash.

How Strong Is Sunflex Tech's Balance Sheet?

The latest balance sheet data shows that Sunflex Tech had liabilities of NT$791.8m due within a year, and liabilities of NT$15.2m falling due after that. On the other hand, it had cash of NT$1.10b and NT$276.5m worth of receivables due within a year. So it actually has NT$565.4m more liquid assets than total liabilities.

This luscious liquidity implies that Sunflex Tech's balance sheet is sturdy like a giant sequoia tree. On this view, lenders should feel as safe as the beloved of a black-belt karate master. Simply put, the fact that Sunflex Tech has more cash than debt is arguably a good indication that it can manage its debt safely. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Sunflex Tech 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.

Over 12 months, Sunflex Tech made a loss at the EBIT level, and saw its revenue drop to NT$650m, which is a fall of 18%. That's not what we would hope to see.

So How Risky Is Sunflex Tech?

We have no doubt that loss making companies are, in general, riskier than profitable ones. And the fact is that over the last twelve months Sunflex Tech lost money at the earnings before interest and tax (EBIT) line. Indeed, in that time it burnt through NT$301k of cash and made a loss of NT$110m. With only NT$481.9m on the balance sheet, it would appear that its going to need to raise capital again soon. Even though its balance sheet seems sufficiently liquid, debt always makes us a little nervous if a company doesn't produce free cash flow regularly. 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. To that end, you should learn about the 4 warning signs we've spotted with Sunflex Tech (including 2 which is are significant) .

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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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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