Advanced Energy Solution Holding (TWSE:6781) Seems To Use Debt Quite Sensibly

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says '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. We note that Advanced Energy Solution Holding Co., Ltd. (TWSE:6781) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

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. If things get really bad, the lenders can take control of the business. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. 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 Advanced Energy Solution Holding

What Is Advanced Energy Solution Holding's Net Debt?

The image below, which you can click on for greater detail, shows that Advanced Energy Solution Holding had debt of NT$808.0m at the end of September 2024, a reduction from NT$1.84b over a year. However, its balance sheet shows it holds NT$6.70b in cash, so it actually has NT$5.89b net cash.

How Strong Is Advanced Energy Solution Holding's Balance Sheet?

We can see from the most recent balance sheet that Advanced Energy Solution Holding had liabilities of NT$5.10b falling due within a year, and liabilities of NT$464.1m due beyond that. Offsetting this, it had NT$6.70b in cash and NT$1.55b in receivables that were due within 12 months. So it can boast NT$2.67b more liquid assets than total liabilities.

This surplus suggests that Advanced Energy Solution Holding has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, Advanced Energy Solution Holding boasts net cash, so it's fair to say it does not have a heavy debt load!

On the other hand, Advanced Energy Solution Holding's EBIT dived 17%, over the last year. We think hat kind of performance, if repeated frequently, could well lead to difficulties for the stock. 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 Advanced Energy Solution Holding'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.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. Advanced Energy Solution Holding 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. In the last three years, Advanced Energy Solution Holding's free cash flow amounted to 29% of its EBIT, less than we'd expect. That weak cash conversion makes it more difficult to handle indebtedness.

Summing Up

While it is always sensible to investigate a company's debt, in this case Advanced Energy Solution Holding has NT$5.89b in net cash and a decent-looking balance sheet. So we are not troubled with Advanced Energy Solution Holding's debt use. 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. For example, we've discovered 1 warning sign for Advanced Energy Solution Holding that you should be aware of before investing here.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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.