Ability Enterprise (TWSE:2374) Has A Rock Solid Balance Sheet

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' 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. As with many other companies Ability Enterprise Co., Ltd. (TWSE:2374) makes use of debt. But the real question is whether this debt is making the company risky.

When Is Debt A Problem?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for Ability Enterprise

What Is Ability Enterprise's Net Debt?

The image below, which you can click on for greater detail, shows that Ability Enterprise had debt of NT$283.6m at the end of June 2024, a reduction from NT$343.5m over a year. However, it does have NT$2.51b in cash offsetting this, leading to net cash of NT$2.23b.

A Look At Ability Enterprise's Liabilities

We can see from the most recent balance sheet that Ability Enterprise had liabilities of NT$2.49b falling due within a year, and liabilities of NT$73.3m due beyond that. On the other hand, it had cash of NT$2.51b and NT$1.02b worth of receivables due within a year. So it actually has NT$966.0m more liquid assets than total liabilities.

This short term liquidity is a sign that Ability Enterprise could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, Ability Enterprise boasts net cash, so it's fair to say it does not have a heavy debt load!

It was also good to see that despite losing money on the EBIT line last year, Ability Enterprise turned things around in the last 12 months, delivering and EBIT of NT$363m. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Ability Enterprise will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While Ability Enterprise 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 last year, Ability Enterprise recorded free cash flow worth a fulsome 93% of its EBIT, which is stronger than we'd usually expect. That positions it well to pay down debt if desirable to do so.

Summing Up

While it is always sensible to investigate a company's debt, in this case Ability Enterprise has NT$2.23b in net cash and a decent-looking balance sheet. And it impressed us with free cash flow of NT$336m, being 93% of its EBIT. So is Ability Enterprise's debt a risk? It doesn't seem so to us. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. Case in point: We've spotted 2 warning signs for Ability Enterprise you should be aware of.

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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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.