Is AmTRAN TechnologyLtd (TPE:2489) Using Debt 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.' 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. We can see that AmTRAN Technology Co.,Ltd (TPE:2489) does use debt in its business. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. If things get really bad, the lenders can take control of the business. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for AmTRAN TechnologyLtd

How Much Debt Does AmTRAN TechnologyLtd Carry?

As you can see below, at the end of December 2020, AmTRAN TechnologyLtd had NT$497.3m of debt, up from NT$180.9m a year ago. Click the image for more detail. However, it does have NT$7.51b in cash offsetting this, leading to net cash of NT$7.01b.

A Look At AmTRAN TechnologyLtd's Liabilities

We can see from the most recent balance sheet that AmTRAN TechnologyLtd had liabilities of NT$5.96b falling due within a year, and liabilities of NT$610.0m due beyond that. On the other hand, it had cash of NT$7.51b and NT$3.93b worth of receivables due within a year. So it can boast NT$4.86b more liquid assets than total liabilities.

This excess liquidity is a great indication that AmTRAN TechnologyLtd's balance sheet is almost as strong as Fort Knox. With this in mind one could posit that its balance sheet means the company is able to handle some adversity. Succinctly put, AmTRAN TechnologyLtd boasts net cash, so it's fair to say it does not have a heavy debt load! When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if AmTRAN TechnologyLtd 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.

In the last year AmTRAN TechnologyLtd wasn't profitable at an EBIT level, but managed to grow its revenue by 10%, to NT$17b. We usually like to see faster growth from unprofitable companies, but each to their own.

So How Risky Is AmTRAN TechnologyLtd?

While AmTRAN TechnologyLtd lost money on an earnings before interest and tax (EBIT) level, it actually booked a paper profit of NT$553m. So taking that on face value, and considering the cash, we don't think its very risky in the near term. With mediocre revenue growth in the last year, we're don't find the investment opportunity particularly compelling. 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 example AmTRAN TechnologyLtd has 3 warning signs (and 2 which are a bit unpleasant) we think 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.

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