Here's Why Amulaire Thermal Technology (TPE:2241) Has A Meaningful Debt Burden

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 Amulaire Thermal Technology, Inc. (TPE:2241) makes use of 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. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for Amulaire Thermal Technology

What Is Amulaire Thermal Technology's Debt?

The image below, which you can click on for greater detail, shows that Amulaire Thermal Technology had debt of NT$486.4m at the end of December 2020, a reduction from NT$719.8m over a year. But it also has NT$588.7m in cash to offset that, meaning it has NT$102.4m net cash.

How Healthy Is Amulaire Thermal Technology's Balance Sheet?

The latest balance sheet data shows that Amulaire Thermal Technology had liabilities of NT$187.5m due within a year, and liabilities of NT$498.6m falling due after that. Offsetting this, it had NT$588.7m in cash and NT$309.0m in receivables that were due within 12 months. So it actually has NT$211.6m more liquid assets than total liabilities.

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

Importantly, Amulaire Thermal Technology's EBIT fell a jaw-dropping 53% in the last twelve months. If that earnings trend continues then paying off its debt will be about as easy as herding cats on to a roller coaster. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Amulaire Thermal Technology's earnings that will influence how the balance sheet holds up in the future. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. Amulaire Thermal 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, Amulaire Thermal Technology saw substantial negative free cash flow, in total. While that may be a result of expenditure for growth, it does make the debt far more risky.

Summing up

While it is always sensible to investigate a company's debt, in this case Amulaire Thermal Technology has NT$102.4m in net cash and a decent-looking balance sheet. So while Amulaire Thermal Technology does not have a great balance sheet, it's certainly not too bad. 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. We've identified 3 warning signs with Amulaire Thermal Technology (at least 1 which is a bit concerning) , and understanding them should be part of your investment process.

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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