We Think Sinher Technology (TPE:4999) Can Manage Its Debt With Ease

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. We note that Sinher Technology Inc. (TPE:4999) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

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. If things get really bad, the lenders can take control of the business. 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, plenty of companies use debt to fund growth, without any negative consequences. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

View our latest analysis for Sinher Technology

What Is Sinher Technology's Debt?

You can click the graphic below for the historical numbers, but it shows that as of December 2020 Sinher Technology had NT$57.1m of debt, an increase on none, over one year. But it also has NT$1.18b in cash to offset that, meaning it has NT$1.13b net cash.

How Strong Is Sinher Technology's Balance Sheet?

We can see from the most recent balance sheet that Sinher Technology had liabilities of NT$810.5m falling due within a year, and liabilities of NT$68.0m due beyond that. Offsetting these obligations, it had cash of NT$1.18b as well as receivables valued at NT$1.39b due within 12 months. So it can boast NT$1.69b more liquid assets than total liabilities.

This surplus liquidity suggests that Sinher Technology's balance sheet could take a hit just as well as Homer Simpson's head can take a punch. On this view, lenders should feel as safe as the beloved of a black-belt karate master. Succinctly put, Sinher Technology boasts net cash, so it's fair to say it does not have a heavy debt load!

Even more impressive was the fact that Sinher Technology grew its EBIT by 113% over twelve months. If maintained that growth will make the debt even more manageable in the years ahead. When analysing debt levels, the balance sheet is the obvious place to start. But it is Sinher 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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. Sinher Technology 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. In the last three years, Sinher Technology's free cash flow amounted to 41% 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 Sinher Technology has NT$1.13b in net cash and a decent-looking balance sheet. And we liked the look of last year's 113% year-on-year EBIT growth. So we don't think Sinher Technology's use of debt is risky. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. We've identified 3 warning signs with Sinher Technology (at least 2 which can't be ignored) , and understanding them should be part of your investment process.

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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