Advanced Microelectronic Products (GTSM:6287) Is Making Moderate Use Of Debt

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.' 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. As with many other companies Advanced Microelectronic Products Inc. (GTSM:6287) makes use of debt. But the more important question is: how much risk is that debt creating?

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, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for Advanced Microelectronic Products

What Is Advanced Microelectronic Products's Debt?

You can click the graphic below for the historical numbers, but it shows that as of September 2020 Advanced Microelectronic Products had NT$984.1m of debt, an increase on NT$737.6m, over one year. However, it does have NT$119.6m in cash offsetting this, leading to net debt of about NT$864.4m.

A Look At Advanced Microelectronic Products's Liabilities

We can see from the most recent balance sheet that Advanced Microelectronic Products had liabilities of NT$1.25b falling due within a year, and liabilities of NT$101.7m due beyond that. Offsetting these obligations, it had cash of NT$119.6m as well as receivables valued at NT$372.5m due within 12 months. So its liabilities total NT$857.6m more than the combination of its cash and short-term receivables.

Advanced Microelectronic Products has a market capitalization of NT$2.70b, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. However, it is still worthwhile taking a close look at its ability to pay off debt. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Advanced Microelectronic Products will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

In the last year Advanced Microelectronic Products had a loss before interest and tax, and actually shrunk its revenue by 3.2%, to NT$1.1b. That's not what we would hope to see.

Caveat Emptor

Over the last twelve months Advanced Microelectronic Products produced an earnings before interest and tax (EBIT) loss. Indeed, it lost NT$192m at the EBIT level. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. So we think its balance sheet is a little strained, though not beyond repair. Another cause for caution is that is bled NT$194m in negative free cash flow over the last twelve months. So suffice it to say we consider the stock very risky. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. Take risks, for example - Advanced Microelectronic Products has 3 warning signs (and 1 which is concerning) we think 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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