We Think ASM Pacific Technology (HKG:522) Can Manage Its Debt With Ease

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.' 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 ASM Pacific Technology Limited (HKG:522) makes use of debt. But the more important question is: how much risk is that debt creating?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. 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 step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for ASM Pacific Technology

What Is ASM Pacific Technology's Net Debt?

You can click the graphic below for the historical numbers, but it shows that ASM Pacific Technology had HK$2.72b of debt in December 2021, down from HK$4.63b, one year before. However, it does have HK$4.88b in cash offsetting this, leading to net cash of HK$2.16b.

A Look At ASM Pacific Technology's Liabilities

The latest balance sheet data shows that ASM Pacific Technology had liabilities of HK$6.89b due within a year, and liabilities of HK$4.20b falling due after that. Offsetting this, it had HK$4.88b in cash and HK$5.91b in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by HK$296.6m.

Having regard to ASM Pacific Technology's size, it seems that its liquid assets are well balanced with its total liabilities. So it's very unlikely that the HK$33.0b company is short on cash, but still worth keeping an eye on the balance sheet. While it does have liabilities worth noting, ASM Pacific Technology also has more cash than debt, so we're pretty confident it can manage its debt safely.

Even more impressive was the fact that ASM Pacific Technology grew its EBIT by 145% over twelve months. That boost will make it even easier to pay down debt going forward. 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 ASM Pacific Technology can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. ASM Pacific 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. During the last three years, ASM Pacific Technology generated free cash flow amounting to a very robust 83% of its EBIT, more than we'd expect. That puts it in a very strong position to pay down debt.

Summing up

We could understand if investors are concerned about ASM Pacific Technology's liabilities, but we can be reassured by the fact it has has net cash of HK$2.16b. The cherry on top was that in converted 83% of that EBIT to free cash flow, bringing in HK$2.2b. So is ASM Pacific Technology's debt a risk? It doesn't seem so to us. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. For example ASM Pacific Technology has 2 warning signs (and 1 which shouldn't be ignored) we think you should know about.

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.