Is Siward Crystal Technology (TPE:2484) A Risky Investment?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. As with many other companies Siward Crystal Technology Co., Ltd. (TPE:2484) makes use of debt. But is this debt a concern to shareholders?

When Is Debt A Problem?

Debt assists a business until the business has trouble paying it off, either with new capital or with free 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for Siward Crystal Technology

How Much Debt Does Siward Crystal Technology Carry?

As you can see below, at the end of September 2020, Siward Crystal Technology had NT$512.9m of debt, up from NT$407.4m a year ago. Click the image for more detail. However, because it has a cash reserve of NT$419.8m, its net debt is less, at about NT$93.1m.

How Strong Is Siward Crystal Technology's Balance Sheet?

We can see from the most recent balance sheet that Siward Crystal Technology had liabilities of NT$672.9m falling due within a year, and liabilities of NT$658.0m due beyond that. On the other hand, it had cash of NT$419.8m and NT$737.6m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by NT$173.5m.

Of course, Siward Crystal Technology has a market capitalization of NT$3.92b, so these liabilities are probably manageable. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward.

We measure a company's debt load relative to its earnings power by looking at its net debt divided by its earnings before interest, tax, depreciation, and amortization (EBITDA) and by calculating how easily its earnings before interest and tax (EBIT) cover its interest expense (interest cover). Thus we consider debt relative to earnings both with and without depreciation and amortization expenses.

Siward Crystal Technology's net debt is only 0.27 times its EBITDA. And its EBIT easily covers its interest expense, being 78.6 times the size. So you could argue it is no more threatened by its debt than an elephant is by a mouse. The good news is that Siward Crystal Technology has increased its EBIT by 7.7% over twelve months, which should ease any concerns about debt repayment. 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 Siward Crystal 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, while the tax-man may adore accounting profits, lenders only accept cold hard cash. So we always check how much of that EBIT is translated into free cash flow. Over the most recent three years, Siward Crystal Technology recorded free cash flow worth 63% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This free cash flow puts the company in a good position to pay down debt, when appropriate.

Our View

Happily, Siward Crystal Technology's impressive interest cover implies it has the upper hand on its debt. And the good news does not stop there, as its net debt to EBITDA also supports that impression! Zooming out, Siward Crystal Technology seems to use debt quite reasonably; and that gets the nod from us. While debt does bring risk, when used wisely it can also bring a higher return on equity. 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. We've identified 3 warning signs with Siward Crystal Technology (at least 1 which can't be ignored) , 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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