These 4 Measures Indicate That Advancetek EnterpriseLtd (TWSE:1442) Is Using Debt Safely

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.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. We can see that Advancetek Enterprise Co.,Ltd. (TWSE:1442) does use debt in its business. But is this debt a concern to shareholders?

When Is Debt Dangerous?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. 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 Advancetek EnterpriseLtd

How Much Debt Does Advancetek EnterpriseLtd Carry?

As you can see below, Advancetek EnterpriseLtd had NT$4.54b of debt at September 2024, down from NT$10.2b a year prior. On the flip side, it has NT$714.9m in cash leading to net debt of about NT$3.83b.

How Healthy Is Advancetek EnterpriseLtd's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Advancetek EnterpriseLtd had liabilities of NT$3.81b due within 12 months and liabilities of NT$3.00b due beyond that. Offsetting this, it had NT$714.9m in cash and NT$131.7m in receivables that were due within 12 months. So its liabilities total NT$5.97b more than the combination of its cash and short-term receivables.

While this might seem like a lot, it is not so bad since Advancetek EnterpriseLtd has a market capitalization of NT$27.6b, and so it could probably strengthen its balance sheet by raising capital if it needed to. But it's clear that we should definitely closely examine whether it can manage its debt without dilution.

We measure a company's debt load relative to its earnings power by looking at its net debt divided by its earnings before interest, tax, depreciation, and amortization (EBITDA) and by calculating how easily its earnings before interest and tax (EBIT) cover its interest expense (interest cover). The advantage of this approach is that we take into account both the absolute quantum of debt (with net debt to EBITDA) and the actual interest expenses associated with that debt (with its interest cover ratio).

Advancetek EnterpriseLtd has a low net debt to EBITDA ratio of only 0.92. And its EBIT easily covers its interest expense, being 41.0 times the size. So we're pretty relaxed about its super-conservative use of debt. Even more impressive was the fact that Advancetek EnterpriseLtd grew its EBIT by 374% over twelve months. If maintained that growth will make the debt even more manageable in the years ahead. The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since Advancetek EnterpriseLtd will need earnings to service that debt. 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. So the logical step is to look at the proportion of that EBIT that is matched by actual free cash flow. Happily for any shareholders, Advancetek EnterpriseLtd actually produced more free cash flow than EBIT over the last two years. There's nothing better than incoming cash when it comes to staying in your lenders' good graces.

Our View

The good news is that Advancetek EnterpriseLtd's demonstrated ability to cover its interest expense with its EBIT delights us like a fluffy puppy does a toddler. And the good news does not stop there, as its conversion of EBIT to free cash flow also supports that impression! Considering this range of factors, it seems to us that Advancetek EnterpriseLtd is quite prudent with its debt, and the risks seem well managed. So the balance sheet looks pretty healthy, 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. To that end, you should be aware of the 3 warning signs we've spotted with Advancetek EnterpriseLtd .

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.

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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.