Does ASPEED Technology (GTSM:5274) Have A Healthy Balance Sheet?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. As with many other companies ASPEED Technology Inc. (GTSM:5274) makes use of debt. But should shareholders be worried about its use of debt?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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, 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.

See our latest analysis for ASPEED Technology

What Is ASPEED Technology's Debt?

You can click the graphic below for the historical numbers, but it shows that ASPEED Technology had NT$290.0m of debt in September 2020, down from NT$350.0m, one year before. But on the other hand it also has NT$1.94b in cash, leading to a NT$1.65b net cash position.

A Look At ASPEED Technology's Liabilities

The latest balance sheet data shows that ASPEED Technology had liabilities of NT$939.6m due within a year, and liabilities of NT$127.1m falling due after that. On the other hand, it had cash of NT$1.94b and NT$528.5m worth of receivables due within a year. So it can boast NT$1.40b more liquid assets than total liabilities.

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

On top of that, ASPEED Technology grew its EBIT by 42% over the last twelve months, and that growth will make it easier to handle its debt. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if ASPEED Technology 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, a company can only pay off debt with cold hard cash, not accounting profits. While ASPEED Technology 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, ASPEED Technology recorded free cash flow worth a fulsome 88% of its EBIT, which is stronger than we'd usually expect. That puts it in a very strong position to pay down debt.

Summing up

While we empathize with investors who find debt concerning, you should keep in mind that ASPEED Technology has net cash of NT$1.65b, as well as more liquid assets than liabilities. The cherry on top was that in converted 88% of that EBIT to free cash flow, bringing in NT$1.1b. So we don't think ASPEED Technology's use of debt is risky. 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. Be aware that ASPEED Technology is showing 1 warning sign in our investment analysis , you should know about...

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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