Scientech (TWSE:3583) 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. As with many other companies Scientech Corporation (TWSE:3583) makes use of debt. But the more important question is: how much risk is that debt creating?

What Risk Does Debt Bring?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for Scientech

What Is Scientech's Net Debt?

As you can see below, at the end of June 2024, Scientech had NT$1.27b of debt, up from NT$427.8m a year ago. Click the image for more detail. However, it does have NT$6.30b in cash offsetting this, leading to net cash of NT$5.04b.

How Healthy Is Scientech's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Scientech had liabilities of NT$16.2b due within 12 months and liabilities of NT$1.38b due beyond that. Offsetting these obligations, it had cash of NT$6.30b as well as receivables valued at NT$676.0m due within 12 months. So its liabilities total NT$10.6b more than the combination of its cash and short-term receivables.

While this might seem like a lot, it is not so bad since Scientech has a market capitalization of NT$37.1b, and so it could probably strengthen its balance sheet by raising capital if it needed to. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. Despite its noteworthy liabilities, Scientech boasts net cash, so it's fair to say it does not have a heavy debt load!

Also positive, Scientech grew its EBIT by 30% in the last year, and that should make it easier to pay down debt, going forward. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Scientech will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. While Scientech 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, Scientech actually produced more free cash flow than EBIT over the last three years. There's nothing better than incoming cash when it comes to staying in your lenders' good graces.

Summing Up

While Scientech does have more liabilities than liquid assets, it also has net cash of NT$5.04b. The cherry on top was that in converted 183% of that EBIT to free cash flow, bringing in NT$1.5b. So we don't think Scientech's use of debt is risky. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. For instance, we've identified 1 warning sign for Scientech that you should be aware of.

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.