Airmate (Cayman) International Co (TPE:1626) Has A Pretty Healthy Balance Sheet

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' 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 can see that Airmate (Cayman) International Co Limited (TPE:1626) does use debt in its business. But should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

See our latest analysis for Airmate (Cayman) International Co

What Is Airmate (Cayman) International Co's Net Debt?

You can click the graphic below for the historical numbers, but it shows that Airmate (Cayman) International Co had NT$698.7m of debt in September 2020, down from NT$1.06b, one year before. But on the other hand it also has NT$904.1m in cash, leading to a NT$205.4m net cash position.

A Look At Airmate (Cayman) International Co's Liabilities

The latest balance sheet data shows that Airmate (Cayman) International Co had liabilities of NT$5.33b due within a year, and liabilities of NT$1.05b falling due after that. Offsetting this, it had NT$904.1m in cash and NT$2.20b in receivables that were due within 12 months. So its liabilities total NT$3.28b more than the combination of its cash and short-term receivables.

This is a mountain of leverage relative to its market capitalization of NT$3.63b. Should its lenders demand that it shore up the balance sheet, shareholders would likely face severe dilution. Despite its noteworthy liabilities, Airmate (Cayman) International Co boasts net cash, so it's fair to say it does not have a heavy debt load!

It is just as well that Airmate (Cayman) International Co's load is not too heavy, because its EBIT was down 62% over the last year. When it comes to paying off debt, falling earnings are no more useful than sugary sodas are for your health. There's no doubt that we learn most about debt from the balance sheet. But it is Airmate (Cayman) International Co's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. While Airmate (Cayman) International Co 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. Happily for any shareholders, Airmate (Cayman) International Co actually produced more free cash flow than EBIT over the last two years. That sort of strong cash generation warms our hearts like a puppy in a bumblebee suit.

Summing up

While Airmate (Cayman) International Co does have more liabilities than liquid assets, it also has net cash of NT$205.4m. The cherry on top was that in converted 365% of that EBIT to free cash flow, bringing in NT$908m. So we don't have any problem with Airmate (Cayman) International Co'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. Be aware that Airmate (Cayman) International Co is showing 2 warning signs in our investment analysis , you should know about...

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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