These 4 Measures Indicate That Syncmold Enterprise (TPE:1582) Is Using Debt Safely

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. We note that Syncmold Enterprise Corp. (TPE:1582) does have debt on its balance sheet. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. 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. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for Syncmold Enterprise

What Is Syncmold Enterprise's Net Debt?

As you can see below, at the end of September 2020, Syncmold Enterprise had NT$1.45b of debt, up from NT$128.3m a year ago. Click the image for more detail. But on the other hand it also has NT$3.18b in cash, leading to a NT$1.73b net cash position.

A Look At Syncmold Enterprise's Liabilities

The latest balance sheet data shows that Syncmold Enterprise had liabilities of NT$4.11b due within a year, and liabilities of NT$429.2m falling due after that. Offsetting this, it had NT$3.18b in cash and NT$3.65b in receivables that were due within 12 months. So it actually has NT$2.29b more liquid assets than total liabilities.

It's good to see that Syncmold Enterprise has plenty of liquidity on its balance sheet, suggesting conservative management of liabilities. Because it has plenty of assets, it is unlikely to have trouble with its lenders. Succinctly put, Syncmold Enterprise boasts net cash, so it's fair to say it does not have a heavy debt load!

Also positive, Syncmold Enterprise grew its EBIT by 29% in the last year, and that should make it easier to pay down debt, going forward. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Syncmold Enterprise can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. While Syncmold 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. During the last three years, Syncmold Enterprise produced sturdy free cash flow equating to 58% of its EBIT, about what we'd expect. This free cash flow puts the company in a good position to pay down debt, when appropriate.

Summing up

While it is always sensible to investigate a company's debt, in this case Syncmold Enterprise has NT$1.73b in net cash and a decent-looking balance sheet. And we liked the look of last year's 29% year-on-year EBIT growth. So is Syncmold Enterprise's debt a risk? It doesn't seem so to us. 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 Syncmold Enterprise , and understanding them should be part of your investment process.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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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