We Think Advancetek EnterpriseLtd (TWSE:1442) Can Stay On Top Of Its Debt

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. We can see that Advancetek Enterprise Co.,Ltd. (TWSE:1442) does use debt in its business. But should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

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 common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

Check out our latest analysis for Advancetek EnterpriseLtd

How Much Debt Does Advancetek EnterpriseLtd Carry?

The image below, which you can click on for greater detail, shows that Advancetek EnterpriseLtd had debt of NT$7.63b at the end of December 2023, a reduction from NT$9.11b over a year. However, it also had NT$678.8m in cash, and so its net debt is NT$6.95b.

A Look At Advancetek EnterpriseLtd's Liabilities

The latest balance sheet data shows that Advancetek EnterpriseLtd had liabilities of NT$7.52b due within a year, and liabilities of NT$2.79b falling due after that. On the other hand, it had cash of NT$678.8m and NT$150.0m worth of receivables due within a year. So it has liabilities totalling NT$9.48b more than its cash and near-term receivables, combined.

This deficit isn't so bad because Advancetek EnterpriseLtd is worth NT$20.2b, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk.

In order to size up a company's debt relative to its earnings, we calculate its net debt divided by its earnings before interest, tax, depreciation, and amortization (EBITDA) and its earnings before interest and tax (EBIT) divided by its interest expense (its interest cover). This way, we consider both the absolute quantum of the debt, as well as the interest rates paid on it.

Advancetek EnterpriseLtd's net debt is 3.5 times its EBITDA, which is a significant but still reasonable amount of leverage. However, its interest coverage of 26.9 is very high, suggesting that the interest expense on the debt is currently quite low. Notably, Advancetek EnterpriseLtd's EBIT launched higher than Elon Musk, gaining a whopping 274% on last year. There's no doubt that we learn most about debt from the balance sheet. 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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. So we always check how much of that EBIT is translated into free cash flow. In the last three years, Advancetek EnterpriseLtd created free cash flow amounting to 3.8% of its EBIT, an uninspiring performance. For us, cash conversion that low sparks a little paranoia about is ability to extinguish debt.

Our View

Advancetek EnterpriseLtd's interest cover was a real positive on this analysis, as was its EBIT growth rate. But truth be told its conversion of EBIT to free cash flow had us nibbling our nails. When we consider all the factors mentioned above, we do feel a bit cautious about Advancetek EnterpriseLtd's use of debt. While we appreciate debt can enhance returns on equity, we'd suggest that shareholders keep close watch on its debt levels, lest they increase. 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 - Advancetek EnterpriseLtd has 2 warning signs we think you should be aware of.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.