Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' 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 note that Sintrones Technology Corp. (GTSM:6680) does have debt on its balance sheet. 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. 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. 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.
See our latest analysis for Sintrones Technology
How Much Debt Does Sintrones Technology Carry?
As you can see below, at the end of September 2020, Sintrones Technology had NT$58.0m of debt, up from NT$40.6m a year ago. Click the image for more detail. However, it does have NT$303.1m in cash offsetting this, leading to net cash of NT$245.1m.
How Strong Is Sintrones Technology's Balance Sheet?
According to the last reported balance sheet, Sintrones Technology had liabilities of NT$98.7m due within 12 months, and liabilities of NT$44.1m due beyond 12 months. Offsetting these obligations, it had cash of NT$303.1m as well as receivables valued at NT$13.7m due within 12 months. So it actually has NT$174.0m more liquid assets than total liabilities.
This surplus suggests that Sintrones Technology is using debt in a way that is appears to be both safe and conservative. Because it has plenty of assets, it is unlikely to have trouble with its lenders. Succinctly put, Sintrones Technology boasts net cash, so it's fair to say it does not have a heavy debt load!
While Sintrones Technology doesn't seem to have gained much on the EBIT line, at least earnings remain stable for now. 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 Sintrones Technology 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 company can only pay off debt with cold hard cash, not accounting profits. While Sintrones Technology 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. In the last three years, Sintrones Technology's free cash flow amounted to 38% of its EBIT, less than we'd expect. That's not great, when it comes to paying down debt.
Summing up
While it is always sensible to investigate a company's debt, in this case Sintrones Technology has NT$245.1m in net cash and a decent-looking balance sheet. So we are not troubled with Sintrones Technology's debt use. 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 instance, we've identified 3 warning signs for Sintrones Technology (1 is concerning) you should be aware of.
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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About TPEX:6680
Sintrones Technology
Researches, designs, manufactures, and sells in-vehicle telematics computing and intelligent transportation solutions in Taiwan and internationally.
Adequate balance sheet very low.
