Is Apacer Technology (TPE:8271) Using Too Much Debt?

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 note that Apacer Technology Inc. (TPE:8271) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

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 frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for Apacer Technology

How Much Debt Does Apacer Technology Carry?

You can click the graphic below for the historical numbers, but it shows that as of June 2020 Apacer Technology had NT$222.2m of debt, an increase on none, over one year. However, its balance sheet shows it holds NT$1.14b in cash, so it actually has NT$912.8m net cash.

How Healthy Is Apacer Technology's Balance Sheet?

We can see from the most recent balance sheet that Apacer Technology had liabilities of NT$1.56b falling due within a year, and liabilities of NT$42.0m due beyond that. Offsetting these obligations, it had cash of NT$1.14b as well as receivables valued at NT$879.4m due within 12 months. So it can boast NT$414.3m more liquid assets than total liabilities.

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

In addition to that, we're happy to report that Apacer Technology has boosted its EBIT by 50%, thus reducing the spectre of future debt repayments. 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 Apacer Technology 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.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. While Apacer 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, Apacer Technology actually produced more free cash flow than EBIT. That sort of strong cash conversion gets us as excited as the crowd when the beat drops at a Daft Punk concert.

Summing up

While we empathize with investors who find debt concerning, you should keep in mind that Apacer Technology has net cash of NT$912.8m, as well as more liquid assets than liabilities. And it impressed us with free cash flow of -NT$12m, being 131% of its EBIT. So is Apacer Technology's debt a risk? It doesn't seem so to us. 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 - Apacer Technology has 2 warning signs (and 1 which makes us a bit uncomfortable) we think you should know about.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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