Is Advanced Optoelectronic Technology (TPE:3437) A Risky Investment?

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.' 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. Importantly, Advanced Optoelectronic Technology Inc. (TPE:3437) does carry 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. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth 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 Optoelectronic Technology

What Is Advanced Optoelectronic Technology's Net Debt?

The image below, which you can click on for greater detail, shows that at September 2020 Advanced Optoelectronic Technology had debt of NT$595.9m, up from NT$291.9m in one year. But it also has NT$918.6m in cash to offset that, meaning it has NT$322.7m net cash.

A Look At Advanced Optoelectronic Technology's Liabilities

The latest balance sheet data shows that Advanced Optoelectronic Technology had liabilities of NT$2.33b due within a year, and liabilities of NT$21.5m falling due after that. Offsetting these obligations, it had cash of NT$918.6m as well as receivables valued at NT$2.04b due within 12 months. So it can boast NT$603.9m more liquid assets than total liabilities.

This short term liquidity is a sign that Advanced Optoelectronic Technology could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, Advanced Optoelectronic Technology boasts net cash, so it's fair to say it does not have a heavy debt load! There's no doubt that we learn most about debt from the balance sheet. But it is Advanced Optoelectronic Technology'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 Advanced Optoelectronic Technology wasn't profitable at an EBIT level, but managed to grow its revenue by 36%, to NT$5.2b. Shareholders probably have their fingers crossed that it can grow its way to profits.

So How Risky Is Advanced Optoelectronic Technology?

By their very nature companies that are losing money are more risky than those with a long history of profitability. And the fact is that over the last twelve months Advanced Optoelectronic Technology lost money at the earnings before interest and tax (EBIT) line. And over the same period it saw negative free cash outflow of NT$476m and booked a NT$140m accounting loss. But at least it has NT$322.7m on the balance sheet to spend on growth, near-term. With very solid revenue growth in the last year, Advanced Optoelectronic Technology may be on a path to profitability. By investing before those profits, shareholders take on more risk in the hope of bigger rewards. 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. To that end, you should learn about the 2 warning signs we've spotted with Advanced Optoelectronic Technology (including 1 which is a bit concerning) .

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. 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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