Is Asia Polymer (TWSE:1308) A Risky Investment?

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.' 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. Importantly, Asia Polymer Corporation (TWSE:1308) does carry debt. But the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. 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. 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.

Check out our latest analysis for Asia Polymer

What Is Asia Polymer's Net Debt?

The image below, which you can click on for greater detail, shows that at June 2024 Asia Polymer had debt of NT$923.0m, up from NT$544.7m in one year. But it also has NT$2.11b in cash to offset that, meaning it has NT$1.19b net cash.

A Look At Asia Polymer's Liabilities

Zooming in on the latest balance sheet data, we can see that Asia Polymer had liabilities of NT$1.52b due within 12 months and liabilities of NT$571.6m due beyond that. Offsetting this, it had NT$2.11b in cash and NT$557.0m in receivables that were due within 12 months. So it can boast NT$582.9m more liquid assets than total liabilities.

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

The modesty of its debt load may become crucial for Asia Polymer if management cannot prevent a repeat of the 86% cut to EBIT over the last year. Falling earnings (if the trend continues) could eventually make even modest debt quite risky. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Asia Polymer 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 Asia Polymer 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 three years, Asia Polymer recorded free cash flow worth a fulsome 83% 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 we empathize with investors who find debt concerning, you should keep in mind that Asia Polymer has net cash of NT$1.19b, as well as more liquid assets than liabilities. The cherry on top was that in converted 83% of that EBIT to free cash flow, bringing in NT$622m. So we don't have any problem with Asia Polymer's use of debt. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. Be aware that Asia Polymer is showing 1 warning sign in our investment analysis , you should know about...

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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.