These 4 Measures Indicate That Amulaire Thermal Technology (TPE:2241) Is Using Debt Extensively

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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. Importantly, Amulaire Thermal Technology, Inc. (TPE:2241) does carry debt. But should shareholders be worried about its use of debt?

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. If things get really bad, the lenders can take control of the business. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for Amulaire Thermal Technology

What Is Amulaire Thermal Technology's Debt?

As you can see below, Amulaire Thermal Technology had NT$498.3m of debt at September 2020, down from NT$719.8m a year prior. On the flip side, it has NT$478.8m in cash leading to net debt of about NT$19.6m.

How Healthy Is Amulaire Thermal Technology's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Amulaire Thermal Technology had liabilities of NT$155.9m due within 12 months and liabilities of NT$505.0m due beyond that. Offsetting these obligations, it had cash of NT$478.8m as well as receivables valued at NT$270.6m due within 12 months. So it actually has NT$88.5m more liquid assets than total liabilities.

This state of affairs indicates that Amulaire Thermal Technology's balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So while it's hard to imagine that the NT$5.43b company is struggling for cash, we still think it's worth monitoring its balance sheet. But either way, Amulaire Thermal Technology has virtually no net debt, so it's fair to say it does not have a heavy debt load!

We measure a company's debt load relative to its earnings power by looking at its net debt divided by its earnings before interest, tax, depreciation, and amortization (EBITDA) and by calculating how easily its earnings before interest and tax (EBIT) cover its interest expense (interest cover). This way, we consider both the absolute quantum of the debt, as well as the interest rates paid on it.

Looking at its net debt to EBITDA of 0.18 and interest cover of 6.8 times, it seems to us that Amulaire Thermal Technology is probably using debt in a pretty reasonable way. But the interest payments are certainly sufficient to have us thinking about how affordable its debt is. In fact Amulaire Thermal Technology's saving grace is its low debt levels, because its EBIT has tanked 32% in the last twelve months. When a company sees its earnings tank, it can sometimes find its relationships with its lenders turn sour. 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 Amulaire Thermal 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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. So the logical step is to look at the proportion of that EBIT that is matched by actual free cash flow. During the last three years, Amulaire Thermal Technology burned a lot of cash. While that may be a result of expenditure for growth, it does make the debt far more risky.

Our View

Both Amulaire Thermal Technology's EBIT growth rate and its conversion of EBIT to free cash flow were discouraging. But at least its net debt to EBITDA is a gleaming silver lining to those clouds. Taking the abovementioned factors together we do think Amulaire Thermal Technology's debt poses some risks to the business. While that debt can boost returns, we think the company has enough leverage now. 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. To that end, you should learn about the 3 warning signs we've spotted with Amulaire Thermal Technology (including 1 which makes us a bit uncomfortable) .

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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