Does Apex Biotechnology (TPE:1733) Have A Healthy 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 might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. As with many other companies Apex Biotechnology Corp. (TPE:1733) makes use of debt. But should shareholders be worried about its use of debt?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. 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.

View our latest analysis for Apex Biotechnology

How Much Debt Does Apex Biotechnology Carry?

The chart below, which you can click on for greater detail, shows that Apex Biotechnology had NT$408.7m in debt in September 2019; about the same as the year before. But on the other hand it also has NT$482.4m in cash, leading to a NT$73.8m net cash position.

How Healthy Is Apex Biotechnology's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Apex Biotechnology had liabilities of NT$532.6m due within 12 months and liabilities of NT$515.4m due beyond that. Offsetting these obligations, it had cash of NT$482.4m as well as receivables valued at NT$430.3m due within 12 months. So it has liabilities totalling NT$135.2m more than its cash and near-term receivables, combined.

Given Apex Biotechnology has a market capitalization of NT$2.83b, it's hard to believe these liabilities pose much threat. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. While it does have liabilities worth noting, Apex Biotechnology also has more cash than debt, so we're pretty confident it can manage its debt safely.

It is just as well that Apex Biotechnology's load is not too heavy, because its EBIT was down 55% over the last year. Falling earnings (if the trend continues) could eventually make even modest debt quite risky. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. For example, we've discovered 2 warning signs for Apex Biotechnology which any shareholder or potential investor should be aware of.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. While Apex Biotechnology 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 three years, Apex Biotechnology produced sturdy free cash flow equating to 59% 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 it is always sensible to look at a company's total liabilities, it is very reassuring that Apex Biotechnology has NT$73.8m in net cash. So we are not troubled with Apex Biotechnology's debt use. While Apex Biotechnology didn't make a statutory profit in the last year, its positive EBIT suggests that profitability might not be far away. Click here to see if its earnings are heading in the right direction, over the medium term.

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.

If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned.

We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Thank you for reading.