Sincere Navigation (TWSE:2605) Has A Rock Solid Balance Sheet

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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. Importantly, Sincere Navigation Corporation (TWSE:2605) does carry debt. But the real question is whether this debt is making the company risky.

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. If things get really bad, the lenders can take control of the business. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. 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 Sincere Navigation

How Much Debt Does Sincere Navigation Carry?

You can click the graphic below for the historical numbers, but it shows that as of March 2024 Sincere Navigation had NT$4.59b of debt, an increase on NT$3.51b, over one year. However, its balance sheet shows it holds NT$6.62b in cash, so it actually has NT$2.03b net cash.

How Healthy Is Sincere Navigation's Balance Sheet?

We can see from the most recent balance sheet that Sincere Navigation had liabilities of NT$5.18b falling due within a year, and liabilities of NT$311.5m due beyond that. On the other hand, it had cash of NT$6.62b and NT$762.1m worth of receivables due within a year. So it can boast NT$1.89b more liquid assets than total liabilities.

This surplus suggests that Sincere Navigation has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, Sincere Navigation boasts net cash, so it's fair to say it does not have a heavy debt load!

On top of that, Sincere Navigation grew its EBIT by 50% over the last twelve months, and that growth will make it easier to handle its debt. The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine Sincere Navigation's ability to maintain a healthy balance sheet going forward. 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. Sincere Navigation 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, Sincere Navigation actually produced more free cash flow than EBIT. 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 it is always sensible to investigate a company's debt, in this case Sincere Navigation has NT$2.03b in net cash and a decent-looking balance sheet. And it impressed us with free cash flow of NT$953m, being 155% of its EBIT. So we don't think Sincere Navigation's use of debt is risky. 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. For example - Sincere Navigation has 1 warning sign we think 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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.