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.’ 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 can see that Solytech Enterprise Corporation (TPE:1471) does use debt in its business. But the real question is whether this debt is making the company risky.
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 common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we think about a company’s use of debt, we first look at cash and debt together.
What Is Solytech Enterprise’s Debt?
The image below, which you can click on for greater detail, shows that at September 2020 Solytech Enterprise had debt of NT$350.6m, up from NT$324.8m in one year. But on the other hand it also has NT$904.6m in cash, leading to a NT$554.0m net cash position.
How Strong Is Solytech Enterprise’s Balance Sheet?
We can see from the most recent balance sheet that Solytech Enterprise had liabilities of NT$942.7m falling due within a year, and liabilities of NT$19.9m due beyond that. Offsetting these obligations, it had cash of NT$904.6m as well as receivables valued at NT$416.8m due within 12 months. So it actually has NT$358.8m more liquid assets than total liabilities.
This surplus strongly suggests that Solytech Enterprise has a rock-solid balance sheet (and the debt is of no concern whatsoever). With this in mind one could posit that its balance sheet means the company is able to handle some adversity. Succinctly put, Solytech Enterprise boasts net cash, so it’s fair to say it does not have a heavy debt load! The balance sheet is clearly the area to focus on when you are analysing debt. But it is Solytech Enterprise’s earnings that will influence how the balance sheet holds up in the future. So when considering debt, it’s definitely worth looking at the earnings trend. Click here for an interactive snapshot.
Over 12 months, Solytech Enterprise saw its revenue hold pretty steady, and it did not report positive earnings before interest and tax. While that hardly impresses, its not too bad either.
So How Risky Is Solytech Enterprise?
Although Solytech Enterprise had an earnings before interest and tax (EBIT) loss over the last twelve months, it made a statutory profit of NT$258m. So taking that on face value, and considering the cash, we don’t think its very risky in the near term. We’ll feel more comfortable with the stock once EBIT is positive, given the lacklustre revenue growth. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet – far from it. Like risks, for instance. Every company has them, and we’ve spotted 2 warning signs for Solytech Enterprise (of which 1 can’t be ignored!) you should know about.
If, after all that, you’re more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.
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This article by Simply Wall St is general in nature. 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.
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