Is AMICCOM Electronics (GTSM:5272) Using Debt Sensibly?

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. We can see that AMICCOM Electronics Corporation (GTSM:5272) does use debt in its business. 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. If things get really bad, the lenders can take control of the business. 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for AMICCOM Electronics

How Much Debt Does AMICCOM Electronics Carry?

You can click the graphic below for the historical numbers, but it shows that AMICCOM Electronics had NT$121.3m of debt in December 2020, down from NT$128.8m, one year before. But it also has NT$159.8m in cash to offset that, meaning it has NT$38.5m net cash.

A Look At AMICCOM Electronics' Liabilities

We can see from the most recent balance sheet that AMICCOM Electronics had liabilities of NT$68.6m falling due within a year, and liabilities of NT$131.8m due beyond that. On the other hand, it had cash of NT$159.8m and NT$57.5m worth of receivables due within a year. So it can boast NT$16.9m more liquid assets than total liabilities.

This state of affairs indicates that AMICCOM Electronics' balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So it's very unlikely that the NT$2.29b company is short on cash, but still worth keeping an eye on the balance sheet. Simply put, the fact that AMICCOM Electronics has more cash than debt is arguably a good indication that it can manage its debt safely. The balance sheet is clearly the area to focus on when you are analysing debt. But it is AMICCOM Electronics'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.

In the last year AMICCOM Electronics had a loss before interest and tax, and actually shrunk its revenue by 15%, to NT$445m. That's not what we would hope to see.

So How Risky Is AMICCOM Electronics?

Although AMICCOM Electronics had an earnings before interest and tax (EBIT) loss over the last twelve months, it generated positive free cash flow of NT$25m. So although it is loss-making, it doesn't seem to have too much near-term balance sheet risk, keeping in mind the net cash. We'll feel more comfortable with the stock once EBIT is positive, given the lacklustre revenue growth. 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 AMICCOM Electronics (including 1 which shouldn't be ignored) .

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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