Is Apex Biotechnology (TPE:1733) Using Too Much Debt?

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.' 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 Apex Biotechnology Corp. (TPE:1733) makes use of debt. But the more important question is: how much risk is that debt creating?

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 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. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for Apex Biotechnology

How Much Debt Does Apex Biotechnology Carry?

As you can see below, Apex Biotechnology had NT$389.9m of debt at December 2020, down from NT$484.0m a year prior. But on the other hand it also has NT$823.0m in cash, leading to a NT$433.1m net cash position.

How Strong Is Apex Biotechnology's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Apex Biotechnology had liabilities of NT$883.4m due within 12 months and liabilities of NT$121.8m due beyond that. Offsetting these obligations, it had cash of NT$823.0m as well as receivables valued at NT$342.7m due within 12 months. So it actually has NT$160.4m more liquid assets than total liabilities.

This short term liquidity is a sign that Apex Biotechnology could probably pay off its debt with ease, as its balance sheet is far from stretched. Simply put, the fact that Apex Biotechnology has more cash than debt is arguably a good indication that it can manage its debt safely.

In fact Apex Biotechnology's saving grace is its low debt levels, because its EBIT has tanked 49% in the last twelve months. 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. But it is Apex Biotechnology's earnings that will influence how the balance sheet holds up in the future. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. Apex Biotechnology may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. Happily for any shareholders, Apex Biotechnology actually produced more free cash flow than EBIT over the last three years. That sort of strong cash conversion gets us as excited as the crowd when the beat drops at a Daft Punk concert.

Summing up

While we empathize with investors who find debt concerning, you should keep in mind that Apex Biotechnology has net cash of NT$433.1m, as well as more liquid assets than liabilities. The cherry on top was that in converted 117% of that EBIT to free cash flow, bringing in NT$232m. So is Apex Biotechnology's debt a risk? It doesn't seem so to us. 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. To that end, you should learn about the 3 warning signs we've spotted with Apex Biotechnology (including 1 which shouldn't be ignored) .

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. 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.
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