Does Advanced Microelectronic Products (GTSM:6287) Have A Healthy Balance Sheet?

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. 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?

What Risk Does Debt Bring?

Debt assists a business until the business has trouble paying it off, either with new capital or with free 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, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for Advanced Microelectronic Products

What Is Advanced Microelectronic Products's Net Debt?

The image below, which you can click on for greater detail, shows that at December 2020 Advanced Microelectronic Products had debt of NT$946.7m, up from NT$773.9m in one year. However, it does have NT$128.2m in cash offsetting this, leading to net debt of about NT$818.5m.

A Look At Advanced Microelectronic Products' Liabilities

According to the last reported balance sheet, Advanced Microelectronic Products had liabilities of NT$1.23b due within 12 months, and liabilities of NT$95.8m due beyond 12 months. Offsetting these obligations, it had cash of NT$128.2m as well as receivables valued at NT$348.1m due within 12 months. So it has liabilities totalling NT$845.3m more than its cash and near-term receivables, combined.

Advanced Microelectronic Products has a market capitalization of NT$3.94b, so it could very likely raise cash to ameliorate 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. 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 Advanced Microelectronic Products 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.

Over 12 months, Advanced Microelectronic Products reported revenue of NT$1.2b, which is a gain of 16%, although it did not report any earnings before interest and tax. That rate of growth is a bit slow for our taste, but it takes all types to make a world.

Caveat Emptor

Importantly, Advanced Microelectronic Products had an earnings before interest and tax (EBIT) loss over the last year. Indeed, it lost NT$119m at the EBIT level. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. However, it doesn't help that it burned through NT$187m of cash over the last year. So suffice it to say we do consider the stock to be risky. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. For instance, we've identified 2 warning signs for Advanced Microelectronic Products (1 is a bit unpleasant) you should be aware of.

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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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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