Is Ampoc Far-East (TWSE:2493) Using Too Much 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. We can see that Ampoc Far-East Co., Ltd. (TWSE:2493) does use debt in its business. 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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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.

View our latest analysis for Ampoc Far-East

How Much Debt Does Ampoc Far-East Carry?

As you can see below, at the end of June 2024, Ampoc Far-East had NT$92.3m of debt, up from none a year ago. Click the image for more detail. However, it does have NT$2.08b in cash offsetting this, leading to net cash of NT$1.99b.

A Look At Ampoc Far-East's Liabilities

We can see from the most recent balance sheet that Ampoc Far-East had liabilities of NT$1.98b falling due within a year, and liabilities of NT$198.8m due beyond that. Offsetting these obligations, it had cash of NT$2.08b as well as receivables valued at NT$774.8m due within 12 months. So it actually has NT$678.3m more liquid assets than total liabilities.

This surplus suggests that Ampoc Far-East has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, Ampoc Far-East boasts net cash, so it's fair to say it does not have a heavy debt load!

The good news is that Ampoc Far-East has increased its EBIT by 6.1% over twelve months, which should ease any concerns about debt repayment. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Ampoc Far-East 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.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While Ampoc Far-East 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 most recent three years, Ampoc Far-East recorded free cash flow worth 72% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This free cash flow puts the company in a good position to pay down debt, when appropriate.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Ampoc Far-East has net cash of NT$1.99b, as well as more liquid assets than liabilities. The cherry on top was that in converted 72% of that EBIT to free cash flow, bringing in NT$620m. So is Ampoc Far-East's debt a risk? It doesn't seem so to us. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. For example, we've discovered 1 warning sign for Ampoc Far-East that you should be aware of before investing here.

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. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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.