Is Sysgration (GTSM:5309) Using Too Much Debt?

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. We can see that Sysgration Ltd. (GTSM:5309) does use debt in its business. But the real question is whether this debt is making the company risky.

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. 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, 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.

View our latest analysis for Sysgration

What Is Sysgration's Debt?

The image below, which you can click on for greater detail, shows that at September 2020 Sysgration had debt of NT$117.8m, up from NT$100.0m in one year. But on the other hand it also has NT$534.2m in cash, leading to a NT$416.4m net cash position.

How Strong Is Sysgration's Balance Sheet?

According to the last reported balance sheet, Sysgration had liabilities of NT$533.6m due within 12 months, and liabilities of NT$34.0m due beyond 12 months. Offsetting these obligations, it had cash of NT$534.2m as well as receivables valued at NT$334.2m due within 12 months. So it actually has NT$300.7m more liquid assets than total liabilities.

This surplus suggests that Sysgration has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, Sysgration boasts net cash, so it's fair to say it does not have a heavy debt load! The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since Sysgration will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

In the last year Sysgration wasn't profitable at an EBIT level, but managed to grow its revenue by 32%, to NT$1.3b. With any luck the company will be able to grow its way to profitability.

So How Risky Is Sysgration?

Statistically speaking companies that lose money are riskier than those that make money. And we do note that Sysgration had an earnings before interest and tax (EBIT) loss, over the last year. Indeed, in that time it burnt through NT$237m of cash and made a loss of NT$189m. But the saving grace is the NT$416.4m on the balance sheet. That means it could keep spending at its current rate for more than two years. Sysgration's revenue growth shone bright over the last year, so it may well be in a position to turn a profit in due course. By investing before those profits, shareholders take on more risk in the hope of bigger rewards. 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 2 warning signs we've spotted with Sysgration (including 1 which can't be ignored) .

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.

If you decide to trade Sysgration, use the lowest-cost* platform that is rated #1 Overall by Barron’s, Interactive Brokers. Trade stocks, options, futures, forex, bonds and funds on 135 markets, all from a single integrated account. Promoted

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.
^*Interactive Brokers Rated Lowest Cost Broker by StockBrokers.com Annual Online Review 2020

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.