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.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. As with many other companies AVerMedia Technologies, Inc. (TPE:2417) makes use of debt. But the real question is whether this debt is making the company risky.
When Is Debt Dangerous?
Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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, debt can be an important tool in businesses, particularly capital heavy businesses. The first step when considering a company's debt levels is to consider its cash and debt together.
Check out our latest analysis for AVerMedia Technologies
What Is AVerMedia Technologies's Net Debt?
As you can see below, at the end of December 2020, AVerMedia Technologies had NT$228.2m of debt, up from none a year ago. Click the image for more detail. But on the other hand it also has NT$3.00b in cash, leading to a NT$2.77b net cash position.
How Healthy Is AVerMedia Technologies' Balance Sheet?
Zooming in on the latest balance sheet data, we can see that AVerMedia Technologies had liabilities of NT$2.14b due within 12 months and liabilities of NT$143.1m due beyond that. On the other hand, it had cash of NT$3.00b and NT$1.29b worth of receivables due within a year. So it actually has NT$2.01b more liquid assets than total liabilities.
This excess liquidity suggests that AVerMedia Technologies is taking a careful approach to debt. Due to its strong net asset position, it is not likely to face issues with its lenders. Succinctly put, AVerMedia Technologies boasts net cash, so it's fair to say it does not have a heavy debt load!
Even more impressive was the fact that AVerMedia Technologies grew its EBIT by 13,140% over twelve months. If maintained that growth will make the debt even more manageable in the years ahead. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if AVerMedia Technologies can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.
Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While AVerMedia Technologies 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. During the last two years, AVerMedia Technologies produced sturdy free cash flow equating to 65% of its EBIT, about what we'd expect. This cold hard cash means it can reduce its debt when it wants to.
Summing up
While we empathize with investors who find debt concerning, you should keep in mind that AVerMedia Technologies has net cash of NT$2.77b, as well as more liquid assets than liabilities. And we liked the look of last year's 13,140% year-on-year EBIT growth. So we don't think AVerMedia Technologies's use of debt is risky. 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 instance, we've identified 1 warning sign for AVerMedia Technologies that you should be aware of.
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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About TWSE:2417
AVerMedia Technologies
Engages in research, development, manufacturing, and sale of computer system equipment and multimedia related products.
Adequate balance sheet and overvalued.
