Is Syncmold Enterprise (TWSE:1582) 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.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. We can see that Syncmold Enterprise Corp. (TWSE:1582) does use debt in its business. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for Syncmold Enterprise

What Is Syncmold Enterprise's Debt?

You can click the graphic below for the historical numbers, but it shows that Syncmold Enterprise had NT$2.10b of debt in December 2023, down from NT$2.85b, one year before. But on the other hand it also has NT$5.20b in cash, leading to a NT$3.10b net cash position.

A Look At Syncmold Enterprise's Liabilities

Zooming in on the latest balance sheet data, we can see that Syncmold Enterprise had liabilities of NT$4.45b due within 12 months and liabilities of NT$557.6m due beyond that. Offsetting these obligations, it had cash of NT$5.20b as well as receivables valued at NT$2.58b due within 12 months. So it actually has NT$2.77b 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. Due to its strong net asset position, it is not likely to face issues with its lenders. Succinctly put, Syncmold Enterprise boasts net cash, so it's fair to say it does not have a heavy debt load!

Better yet, Syncmold Enterprise grew its EBIT by 127% last year, which is an impressive improvement. That boost will make it even easier to pay down debt going forward. There's no doubt that we learn most about debt from the balance sheet. 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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. 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. Happily for any shareholders, Syncmold Enterprise actually produced more free cash flow than EBIT over the last three years. That sort of strong cash conversion gets us as excited as the crowd when the beat drops at a Daft Punk concert.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Syncmold Enterprise has net cash of NT$3.10b, as well as more liquid assets than liabilities. And it impressed us with free cash flow of NT$962m, being 160% of its EBIT. The bottom line is that we do not find Syncmold Enterprise's debt levels at all concerning. 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. Case in point: We've spotted 3 warning signs for Syncmold Enterprise you should be aware of, and 1 of them is potentially serious.

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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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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.