Here's Why Angelalign Technology (HKG:6699) Can Manage Its Debt Responsibly

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 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. As with many other companies Angelalign Technology Inc. (HKG:6699) makes use of debt. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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, 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.

See our latest analysis for Angelalign Technology

How Much Debt Does Angelalign Technology Carry?

You can click the graphic below for the historical numbers, but it shows that as of June 2024 Angelalign Technology had CN¥324.0m of debt, an increase on CN¥16.6m, over one year. However, its balance sheet shows it holds CN¥3.46b in cash, so it actually has CN¥3.14b net cash.

How Healthy Is Angelalign Technology's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Angelalign Technology had liabilities of CN¥1.35b due within 12 months and liabilities of CN¥457.0m due beyond that. Offsetting these obligations, it had cash of CN¥3.46b as well as receivables valued at CN¥209.1m due within 12 months. So it actually has CN¥1.87b more liquid assets than total liabilities.

This surplus suggests that Angelalign Technology is using debt in a way that is appears to be both safe and conservative. Given it has easily adequate short term liquidity, we don't think it will have any issues with its lenders. Succinctly put, Angelalign Technology boasts net cash, so it's fair to say it does not have a heavy debt load!

In fact Angelalign Technology's saving grace is its low debt levels, because its EBIT has tanked 95% in the last twelve months. Falling earnings (if the trend continues) could eventually make even modest debt quite risky. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if Angelalign Technology 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 company can only pay off debt with cold hard cash, not accounting profits. Angelalign Technology 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, Angelalign Technology reported free cash flow worth 5.2% of its EBIT, which is really quite low. That limp level of cash conversion undermines its ability to manage and pay down debt.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Angelalign Technology has net cash of CN¥3.14b, as well as more liquid assets than liabilities. So we are not troubled with Angelalign Technology's debt use. 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 - Angelalign Technology has 2 warning signs 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.

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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.