Here's Why AcBel Polytech (TPE:6282) Can Manage Its Debt Responsibly

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 might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. 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?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. 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 AcBel Polytech

How Much Debt Does AcBel Polytech Carry?

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, it does have NT$8.14b in cash offsetting this, leading to net cash of NT$3.03b.

How Strong Is AcBel Polytech's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that AcBel Polytech had liabilities of NT$11.5b due within 12 months and liabilities of NT$2.80b due beyond that. 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.

Since publicly traded AcBel Polytech shares are worth a total of NT$14.9b, it seems unlikely that this level of liabilities would be a major threat. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. While it does have liabilities worth noting, AcBel Polytech also has more cash than debt, so we're pretty confident it can manage its debt safely.

On top of that, AcBel Polytech grew its EBIT by 33% over the last twelve months, and that growth will make it easier to handle its debt. 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 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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. 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. During the last three years, AcBel Polytech burned a lot of cash. While investors are no doubt expecting a reversal of that situation in due course, it clearly does mean its use of debt is more risky.

Summing up

While it is always sensible to look at a company's total liabilities, it is very reassuring that AcBel Polytech has NT$3.03b in net cash. And we liked the look of last year's 33% year-on-year EBIT growth. So we don't have any problem with AcBel Polytech's use of debt. When analysing debt levels, the balance sheet is the obvious place to start. 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 are potentially serious!) that you should be aware of before investing here.

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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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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