These 4 Measures Indicate That Silicon Power Computer & Communications (GTSM:4973) Is Using Debt Reasonably Well

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. As with many other companies Silicon Power Computer & Communications Inc. (GTSM:4973) makes use of debt. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for Silicon Power Computer & Communications

What Is Silicon Power Computer & Communications's Debt?

The chart below, which you can click on for greater detail, shows that Silicon Power Computer & Communications had NT$260.0m in debt in September 2020; about the same as the year before. But on the other hand it also has NT$490.2m in cash, leading to a NT$230.2m net cash position.

How Healthy Is Silicon Power Computer & Communications' Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Silicon Power Computer & Communications had liabilities of NT$850.4m due within 12 months and liabilities of NT$8.47m due beyond that. Offsetting this, it had NT$490.2m in cash and NT$452.8m in receivables that were due within 12 months. So it actually has NT$84.2m more liquid assets than total liabilities.

This surplus suggests that Silicon Power Computer & Communications has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, Silicon Power Computer & Communications boasts net cash, so it's fair to say it does not have a heavy debt load!

The modesty of its debt load may become crucial for Silicon Power Computer & Communications if management cannot prevent a repeat of the 39% cut to EBIT over the last year. When it comes to paying off debt, falling earnings are no more useful than sugary sodas are for your health. There's no doubt that we learn most about debt from the balance sheet. But it is Silicon Power Computer & Communications'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. Silicon Power Computer & Communications 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. Happily for any shareholders, Silicon Power Computer & Communications actually produced more free cash flow than EBIT over the last two years. That sort of strong cash generation warms our hearts like a puppy in a bumblebee suit.

Summing up

While it is always sensible to investigate a company's debt, in this case Silicon Power Computer & Communications has NT$230.2m in net cash and a decent-looking balance sheet. The cherry on top was that in converted 203% of that EBIT to free cash flow, bringing in NT$128m. So we don't have any problem with Silicon Power Computer & Communications's use of debt. 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. Consider risks, for instance. Every company has them, and we've spotted 3 warning signs for Silicon Power Computer & Communications you should know about.

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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