These 4 Measures Indicate That SINBON Electronics (TWSE:3023) Is Using Debt Safely

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 SINBON Electronics Co., Ltd. (TWSE:3023) does have debt on its balance sheet. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

Debt assists a business until the business has trouble paying it off, either with new capital or with free 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 step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for SINBON Electronics

How Much Debt Does SINBON Electronics Carry?

You can click the graphic below for the historical numbers, but it shows that SINBON Electronics had NT$3.05b of debt in September 2024, down from NT$3.35b, one year before. However, its balance sheet shows it holds NT$5.56b in cash, so it actually has NT$2.52b net cash.

How Strong Is SINBON Electronics' Balance Sheet?

Zooming in on the latest balance sheet data, we can see that SINBON Electronics had liabilities of NT$13.4b due within 12 months and liabilities of NT$794.9m due beyond that. On the other hand, it had cash of NT$5.56b and NT$9.91b worth of receivables due within a year. So it can boast NT$1.30b more liquid assets than total liabilities.

This short term liquidity is a sign that SINBON Electronics could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, SINBON Electronics boasts net cash, so it's fair to say it does not have a heavy debt load!

SINBON Electronics's EBIT was pretty flat over the last year, but that shouldn't be an issue given the it doesn't have a lot of debt. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if SINBON Electronics can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. SINBON Electronics 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. During the last three years, SINBON Electronics generated free cash flow amounting to a very robust 85% of its EBIT, more than we'd 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$2.52b in net cash and a decent-looking balance sheet. The cherry on top was that in converted 85% of that EBIT to free cash flow, bringing in NT$2.2b. So we don't think SINBON Electronics's use of debt is risky. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. These risks can be hard to spot. Every company has them, and we've spotted 1 warning sign for SINBON Electronics you should know about.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.