Is Scientech (TPE:3583) A Risky Investment?

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.' 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 note that Scientech Corporation (TPE:3583) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

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. 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. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for Scientech

How Much Debt Does Scientech Carry?

You can click the graphic below for the historical numbers, but it shows that as of December 2020 Scientech had NT$222.2m of debt, an increase on none, over one year. However, its balance sheet shows it holds NT$957.8m in cash, so it actually has NT$735.7m net cash.

How Healthy Is Scientech's Balance Sheet?

The latest balance sheet data shows that Scientech had liabilities of NT$1.80b due within a year, and liabilities of NT$150.7m falling due after that. On the other hand, it had cash of NT$957.8m and NT$774.5m worth of receivables due within a year. So it has liabilities totalling NT$214.1m more than its cash and near-term receivables, combined.

Of course, Scientech has a market capitalization of NT$5.76b, so these liabilities are probably manageable. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. While it does have liabilities worth noting, Scientech also has more cash than debt, so we're pretty confident it can manage its debt safely.

Also positive, Scientech grew its EBIT by 20% in the last year, and that should make it easier to pay down debt, going forward. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Scientech's earnings that will influence how the balance sheet holds up in the future. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. Scientech may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. Over the last three years, Scientech recorded free cash flow worth a fulsome 97% of its EBIT, which is stronger than we'd usually expect. That puts it in a very strong position to pay down debt.

Summing up

We could understand if investors are concerned about Scientech's liabilities, but we can be reassured by the fact it has has net cash of NT$735.7m. The cherry on top was that in converted 97% of that EBIT to free cash flow, bringing in NT$694m. So is Scientech's debt a risk? It doesn't seem so to us. 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 be aware of the 1 warning sign we've spotted with Scientech .

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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