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 note that AcBel Polytech Inc. (TPE:6282) does have debt on its balance sheet. 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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. When we think about a company's use of debt, we first look at cash and debt together.
Check out our latest analysis for AcBel Polytech
What Is AcBel Polytech's Debt?
You can click the graphic below for the historical numbers, but it shows that as of September 2020 AcBel Polytech had NT$5.11b of debt, an increase on NT$2.81b, over one year. However, its balance sheet shows it holds NT$8.14b in cash, so it actually has NT$3.03b net cash.
How Healthy Is AcBel Polytech's Balance Sheet?
According to the last reported balance sheet, AcBel Polytech had liabilities of NT$11.5b due within 12 months, and liabilities of NT$2.80b due beyond 12 months. On the other hand, it had cash of NT$8.14b and NT$5.71b worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by NT$494.3m.
Of course, AcBel Polytech has a market capitalization of NT$14.8b, so these liabilities are probably manageable. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. Despite its noteworthy liabilities, AcBel Polytech boasts net cash, so it's fair to say it does not have a heavy debt load!
In addition to that, we're happy to report that AcBel Polytech has boosted its EBIT by 33%, thus reducing the spectre of future debt repayments. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if AcBel Polytech 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 business needs free cash flow to pay off debt; accounting profits just don't cut it. AcBel Polytech 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, AcBel Polytech 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
We could understand if investors are concerned about AcBel Polytech's liabilities, but we can be reassured by the fact it has has net cash of NT$3.03b. And it impressed us with its EBIT growth of 33% over the last year. So we are not troubled with AcBel Polytech's debt use. 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. For example, we've discovered 3 warning signs for AcBel Polytech (2 shouldn't be ignored!) 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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This article by Simply Wall St is general in nature. 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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About TWSE:6282
Excellent balance sheet and fair value.
