Does Simplo Technology (GTSM:6121) Have A Healthy Balance Sheet?

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.' 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. As with many other companies Simplo Technology Co., Ltd. (GTSM:6121) makes use of debt. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

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 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.

Check out our latest analysis for Simplo Technology

What Is Simplo Technology's Net Debt?

As you can see below, Simplo Technology had NT$1.25b of debt at September 2020, down from NT$2.13b a year prior. However, it does have NT$16.7b in cash offsetting this, leading to net cash of NT$15.5b.

A Look At Simplo Technology's Liabilities

Zooming in on the latest balance sheet data, we can see that Simplo Technology had liabilities of NT$33.1b due within 12 months and liabilities of NT$1.62b due beyond that. Offsetting these obligations, it had cash of NT$16.7b as well as receivables valued at NT$16.1b due within 12 months. So its liabilities total NT$1.85b more than the combination of its cash and short-term receivables.

Of course, Simplo Technology has a market capitalization of NT$65.0b, so these liabilities are probably manageable. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. While it does have liabilities worth noting, Simplo Technology also has more cash than debt, so we're pretty confident it can manage its debt safely.

Another good sign is that Simplo Technology has been able to increase its EBIT by 29% in twelve months, making it easier to pay down debt. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine Simplo Technology's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. Simplo Technology 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. Over the most recent three years, Simplo Technology recorded free cash flow worth 73% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This cold hard cash means it can reduce its debt when it wants to.

Summing up

We could understand if investors are concerned about Simplo Technology's liabilities, but we can be reassured by the fact it has has net cash of NT$15.5b. And it impressed us with its EBIT growth of 29% over the last year. So is Simplo Technology's debt a risk? It doesn't seem so to us. Another positive for shareholders is that it pays dividends. So if you like receiving those dividend payments, check Simplo Technology's dividend history, without delay!

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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