Is SINBON Electronics (TWSE:3023) Using Too Much Debt?

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the 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. Importantly, SINBON Electronics Co., Ltd. (TWSE:3023) does carry debt. But is this debt a concern to shareholders?

When Is Debt A Problem?

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 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, 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 SINBON Electronics

What Is SINBON Electronics's Debt?

As you can see below, SINBON Electronics had NT$2.32b of debt at March 2024, down from NT$4.10b a year prior. However, it does have NT$6.08b in cash offsetting this, leading to net cash of NT$3.76b.

A Look At SINBON Electronics' Liabilities

The latest balance sheet data shows that SINBON Electronics had liabilities of NT$12.7b due within a year, and liabilities of NT$962.8m falling due after that. Offsetting this, it had NT$6.08b in cash and NT$8.07b in receivables that were due within 12 months. So it can boast NT$473.9m more liquid assets than total liabilities.

This state of affairs indicates that SINBON Electronics' balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So while it's hard to imagine that the NT$70.0b company is struggling for cash, we still think it's worth monitoring its balance sheet. Succinctly put, SINBON Electronics boasts net cash, so it's fair to say it does not have a heavy debt load!

But the bad news is that SINBON Electronics has seen its EBIT plunge 14% in the last twelve months. We think hat kind of performance, if repeated frequently, could well lead to difficulties for the stock. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if SINBON Electronics 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. While SINBON Electronics 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. Over the last three years, SINBON Electronics recorded free cash flow worth a fulsome 83% of its EBIT, which is stronger than we'd usually expect. That positions it well to pay down debt if desirable to do so.

Summing Up

While it is always sensible to investigate a company's debt, in this case SINBON Electronics has NT$3.76b in net cash and a decent-looking balance sheet. The cherry on top was that in converted 83% of that EBIT to free cash flow, bringing in NT$3.8b. So we don't have any problem with SINBON Electronics's use of debt. Another positive for shareholders is that it pays dividends. So if you like receiving those dividend payments, check SINBON Electronics's dividend history, without delay!

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.