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. We can see that Sintrones Technology Corp. (GTSM:6680) does use debt in its business. But the more important question is: how much risk is that debt creating?
When Is Debt Dangerous?
Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own 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. 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.
What Is Sintrones Technology's Debt?
You can click the graphic below for the historical numbers, but it shows that as of September 2020 Sintrones Technology had NT$58.0m of debt, an increase on NT$40.6m, over one year. But it also has NT$303.1m in cash to offset that, meaning it has NT$245.1m net cash.
A Look At Sintrones Technology's Liabilities
Zooming in on the latest balance sheet data, we can see that Sintrones Technology had liabilities of NT$98.7m due within 12 months and liabilities of NT$44.1m due beyond that. 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 has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, Sintrones Technology boasts net cash, so it's fair to say it does not have a heavy debt load!
Sintrones Technology's EBIT was pretty flat over the last year, but that shouldn't be an issue given the it doesn't have a lot of debt. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Sintrones Technology'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 business needs free cash flow to pay off debt; accounting profits just don't cut it. 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. Looking at the most recent three years, Sintrones Technology recorded free cash flow of 38% of its EBIT, which is weaker than we'd expect. That's not great, when it comes to paying down debt.
While we empathize with investors who find debt concerning, you should keep in mind that Sintrones Technology has net cash of NT$245.1m, as well as more liquid assets than liabilities. So we don't have any problem with Sintrones Technology'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. To that end, you should learn about the 3 warning signs we've spotted with Sintrones Technology (including 1 which makes us a bit uncomfortable) .
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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