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

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. As with many other companies Sunflex Tech Co., Ltd. (GTSM:3390) makes use of debt. But the more important question is: how much risk is that debt creating?

When Is Debt Dangerous?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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 step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for Sunflex Tech

What Is Sunflex Tech's Debt?

You can click the graphic below for the historical numbers, but it shows that as of December 2020 Sunflex Tech had NT$613.0m of debt, an increase on NT$540.0m, over one year. However, it does have NT$1.10b in cash offsetting this, leading to net cash of NT$483.1m.

A Look At Sunflex Tech's Liabilities

The latest balance sheet data shows that Sunflex Tech had liabilities of NT$830.6m due within a year, and liabilities of NT$13.9m falling due after that. On the other hand, it had cash of NT$1.10b and NT$287.2m worth of receivables due within a year. So it can boast NT$538.9m more liquid assets than total liabilities.

This surplus strongly suggests that Sunflex Tech has a rock-solid balance sheet (and the debt is of no concern whatsoever). With this in mind one could posit that its balance sheet means the company is able to handle some adversity. Succinctly put, Sunflex Tech boasts net cash, so it's fair to say it does not have a heavy debt load! When analysing debt levels, the balance sheet is the obvious place to start. But it is Sunflex Tech'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.

In the last year Sunflex Tech had a loss before interest and tax, and actually shrunk its revenue by 8.4%, to NT$657m. We would much prefer see growth.

So How Risky Is Sunflex Tech?

While Sunflex Tech lost money on an earnings before interest and tax (EBIT) level, it actually generated positive free cash flow NT$834k. So although it is loss-making, it doesn't seem to have too much near-term balance sheet risk, keeping in mind the net cash. We'll feel more comfortable with the stock once EBIT is positive, given the lacklustre revenue growth. 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. We've identified 4 warning signs with Sunflex Tech (at least 2 which are a bit unpleasant) , and understanding them should be part of your investment process.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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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