Is Cypress TechnologyLtd (GTSM:3541) A Risky Investment?

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.' 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. Importantly, Cypress Technology Co.,Ltd. (GTSM:3541) does carry debt. But is this debt a concern to shareholders?

When Is Debt Dangerous?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. 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. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for Cypress TechnologyLtd

What Is Cypress TechnologyLtd's Debt?

The chart below, which you can click on for greater detail, shows that Cypress TechnologyLtd had NT$256.0m in debt in September 2020; about the same as the year before. But on the other hand it also has NT$416.0m in cash, leading to a NT$160.0m net cash position.

A Look At Cypress TechnologyLtd's Liabilities

We can see from the most recent balance sheet that Cypress TechnologyLtd had liabilities of NT$611.4m falling due within a year, and liabilities of NT$29.4m due beyond that. Offsetting these obligations, it had cash of NT$416.0m as well as receivables valued at NT$288.3m due within 12 months. So it can boast NT$63.5m more liquid assets than total liabilities.

This state of affairs indicates that Cypress TechnologyLtd's balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So it's very unlikely that the NT$3.33b company is short on cash, but still worth keeping an eye on the balance sheet. Succinctly put, Cypress TechnologyLtd boasts net cash, so it's fair to say it does not have a heavy debt load!

In fact Cypress TechnologyLtd's saving grace is its low debt levels, because its EBIT has tanked 24% in the last twelve months. Falling earnings (if the trend continues) could eventually make even modest debt quite risky. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Cypress TechnologyLtd'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.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. Cypress TechnologyLtd 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, Cypress TechnologyLtd generated free cash flow amounting to a very robust 83% of its EBIT, more than we'd 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 Cypress TechnologyLtd has net cash of NT$160.0m, as well as more liquid assets than liabilities. The cherry on top was that in converted 83% of that EBIT to free cash flow, bringing in NT$93m. So we don't have any problem with Cypress TechnologyLtd'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 3 warning signs for Cypress TechnologyLtd that you should be aware of before investing here.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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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