We Think Singatron Enterprise (GTSM:6126) Can Manage Its Debt With Ease

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a 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, Singatron Enterprise Co., Ltd. (GTSM:6126) does carry debt. But the real question is whether this debt is making the company risky.

When Is Debt A Problem?

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. If things get really bad, the lenders can take control of the business. 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

Check out our latest analysis for Singatron Enterprise

What Is Singatron Enterprise's Net Debt?

The image below, which you can click on for greater detail, shows that at September 2020 Singatron Enterprise had debt of NT$476.0m, up from NT$347.6m in one year. However, it does have NT$803.8m in cash offsetting this, leading to net cash of NT$327.9m.

A Look At Singatron Enterprise's Liabilities

Zooming in on the latest balance sheet data, we can see that Singatron Enterprise had liabilities of NT$1.53b due within 12 months and liabilities of NT$440.6m due beyond that. Offsetting this, it had NT$803.8m in cash and NT$1.49b in receivables that were due within 12 months. So it actually has NT$321.5m more liquid assets than total liabilities.

This surplus suggests that Singatron Enterprise has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Simply put, the fact that Singatron Enterprise has more cash than debt is arguably a good indication that it can manage its debt safely.

Better yet, Singatron Enterprise grew its EBIT by 108% last year, which is an impressive improvement. That boost will make it even easier to pay down debt going forward. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Singatron Enterprise 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.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. While Singatron Enterprise has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. Over the most recent three years, Singatron Enterprise recorded free cash flow worth 71% 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

While we empathize with investors who find debt concerning, you should keep in mind that Singatron Enterprise has net cash of NT$327.9m, as well as more liquid assets than liabilities. And we liked the look of last year's 108% year-on-year EBIT growth. So we don't think Singatron Enterprise's use of debt is risky. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. Consider for instance, the ever-present spectre of investment risk. We've identified 1 warning sign with Singatron Enterprise , and understanding them should be part of your investment process.

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.

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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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