We Think Airtac International Group (TWSE:1590) Can Stay On Top Of Its Debt

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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, Airtac International Group (TWSE:1590) does carry debt. But the real question is whether this debt is making the company risky.

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 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. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for Airtac International Group

What Is Airtac International Group's Net Debt?

The image below, which you can click on for greater detail, shows that Airtac International Group had debt of NT$4.08b at the end of September 2024, a reduction from NT$10.2b over a year. However, its balance sheet shows it holds NT$7.80b in cash, so it actually has NT$3.72b net cash.

How Healthy Is Airtac International Group's Balance Sheet?

The latest balance sheet data shows that Airtac International Group had liabilities of NT$10.9b due within a year, and liabilities of NT$513.2m falling due after that. Offsetting these obligations, it had cash of NT$7.80b as well as receivables valued at NT$10.5b due within 12 months. So it actually has NT$6.87b more liquid assets than total liabilities.

This short term liquidity is a sign that Airtac International Group could probably pay off its debt with ease, as its balance sheet is far from stretched. Simply put, the fact that Airtac International Group has more cash than debt is arguably a good indication that it can manage its debt safely.

The good news is that Airtac International Group has increased its EBIT by 5.9% over twelve months, which should ease any concerns about debt repayment. The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine Airtac International Group's ability to maintain a healthy balance sheet going forward. 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. While Airtac International Group 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 most recent three years, Airtac International Group recorded free cash flow worth 51% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This free cash flow puts the company in a good position to pay down debt, when appropriate.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Airtac International Group has net cash of NT$3.72b, as well as more liquid assets than liabilities. And it also grew its EBIT by 5.9% over the last year. So we don't think Airtac International Group's use of debt is risky. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. These risks can be hard to spot. Every company has them, and we've spotted 1 warning sign for Airtac International Group you should know about.

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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.