Syncmold Enterprise (TWSE:1582) Could Easily Take On More Debt

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 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 can see that Syncmold Enterprise Corp. (TWSE:1582) does use debt in its business. But is this debt a concern to shareholders?

When Is Debt Dangerous?

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

See our latest analysis for Syncmold Enterprise

What Is Syncmold Enterprise's Net Debt?

The image below, which you can click on for greater detail, shows that Syncmold Enterprise had debt of NT$1.81b at the end of March 2024, a reduction from NT$2.85b over a year. But it also has NT$5.71b in cash to offset that, meaning it has NT$3.90b net cash.

How Strong Is Syncmold Enterprise's Balance Sheet?

According to the last reported balance sheet, Syncmold Enterprise had liabilities of NT$4.06b due within 12 months, and liabilities of NT$547.8m due beyond 12 months. Offsetting these obligations, it had cash of NT$5.71b as well as receivables valued at NT$2.39b due within 12 months. So it can boast NT$3.50b more liquid assets than total liabilities.

This surplus suggests that Syncmold Enterprise is using debt in a way that is appears to be both safe and conservative. Because it has plenty of assets, it is unlikely to have trouble with its lenders. Simply put, the fact that Syncmold Enterprise has more cash than debt is arguably a good indication that it can manage its debt safely.

Better yet, Syncmold Enterprise grew its EBIT by 211% last year, which is an impressive improvement. That boost will make it even 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. Syncmold Enterprise 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, Syncmold Enterprise actually produced more free cash flow than EBIT. There's nothing better than incoming cash when it comes to staying in your lenders' good graces.

Summing Up

While it is always sensible to investigate a company's debt, in this case Syncmold Enterprise has NT$3.90b in net cash and a decent-looking balance sheet. The cherry on top was that in converted 175% of that EBIT to free cash flow, bringing in NT$1.4b. When it comes to Syncmold Enterprise's debt, we sufficiently relaxed that our mind turns to the jacuzzi. 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. We've identified 4 warning signs with Syncmold Enterprise (at least 1 which doesn't sit too well with us) , and understanding them should be part of your investment process.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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.