Audix (TPE:2459) Could Easily Take On More Debt

Warren Buffett famously said, '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. We can see that Audix Corporation (TPE:2459) does use debt in its business. But is this debt a concern to shareholders?

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. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for Audix

What Is Audix's Net Debt?

The chart below, which you can click on for greater detail, shows that Audix had NT$2.24b in debt in September 2020; about the same as the year before. But it also has NT$3.91b in cash to offset that, meaning it has NT$1.67b net cash.

How Strong Is Audix's Balance Sheet?

We can see from the most recent balance sheet that Audix had liabilities of NT$2.49b falling due within a year, and liabilities of NT$1.25b due beyond that. On the other hand, it had cash of NT$3.91b and NT$1.77b worth of receivables due within a year. So it actually has NT$1.95b more liquid assets than total liabilities.

This surplus liquidity suggests that Audix's balance sheet could take a hit just as well as Homer Simpson's head can take a punch. On this view, lenders should feel as safe as the beloved of a black-belt karate master. Simply put, the fact that Audix has more cash than debt is arguably a good indication that it can manage its debt safely.

Another good sign is that Audix has been able to increase its EBIT by 22% in twelve months, making it easier to pay down debt. The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since Audix will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. While Audix 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 three years, Audix actually produced more free cash flow than EBIT. That sort of strong cash generation warms our hearts like a puppy in a bumblebee suit.

Summing up

While we empathize with investors who find debt concerning, you should keep in mind that Audix has net cash of NT$1.67b, as well as more liquid assets than liabilities. The cherry on top was that in converted 140% of that EBIT to free cash flow, bringing in NT$1.1b. The bottom line is that we do not find Audix's debt levels at all concerning. 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. For example, we've discovered 2 warning signs for Audix that you should be aware of before investing here.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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