Is Anapass (KOSDAQ:123860) Using Too Much Debt?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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 Anapass, Inc. (KOSDAQ:123860) does use debt in its business. But the more important question is: how much risk is that debt creating?

What Risk Does Debt Bring?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. 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 Anapass

What Is Anapass's Net Debt?

As you can see below, Anapass had ₩4.50b of debt at March 2024, down from ₩19.6b a year prior. But it also has ₩54.2b in cash to offset that, meaning it has ₩49.7b net cash.

A Look At Anapass' Liabilities

We can see from the most recent balance sheet that Anapass had liabilities of ₩58.5b falling due within a year, and liabilities of ₩366.0m due beyond that. Offsetting this, it had ₩54.2b in cash and ₩10.8b in receivables that were due within 12 months. So it can boast ₩6.10b more liquid assets than total liabilities.

This short term liquidity is a sign that Anapass could probably pay off its debt with ease, as its balance sheet is far from stretched. Simply put, the fact that Anapass has more cash than debt is arguably a good indication that it can manage its debt safely.

It was also good to see that despite losing money on the EBIT line last year, Anapass turned things around in the last 12 months, delivering and EBIT of ₩4.1b. 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 Anapass'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.

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

Summing Up

While it is always sensible to investigate a company's debt, in this case Anapass has ₩49.7b in net cash and a decent-looking balance sheet. And it impressed us with free cash flow of ₩21b, being 498% of its EBIT. So is Anapass's debt a risk? It doesn't seem so to us. 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. These risks can be hard to spot. Every company has them, and we've spotted 2 warning signs for Anapass you should know about.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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.

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