AP Memory Technology (TWSE:6531) Could Easily Take On More Debt

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. As with many other companies AP Memory Technology Corporation (TWSE:6531) makes use of debt. But should shareholders be worried about its use of debt?

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Why Does Debt Bring Risk?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. If things get really bad, the lenders can take control of the business. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. 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. The first step when considering a company's debt levels is to consider its cash and debt together.

What Is AP Memory Technology's Debt?

The image below, which you can click on for greater detail, shows that AP Memory Technology had debt of NT$100.0m at the end of December 2024, a reduction from NT$300.0m over a year. However, its balance sheet shows it holds NT$8.94b in cash, so it actually has NT$8.84b net cash.

A Look At AP Memory Technology's Liabilities

The latest balance sheet data shows that AP Memory Technology had liabilities of NT$965.0m due within a year, and liabilities of NT$136.2m falling due after that. Offsetting this, it had NT$8.94b in cash and NT$578.1m in receivables that were due within 12 months. So it actually has NT$8.41b more liquid assets than total liabilities.

It's good to see that AP Memory Technology has plenty of liquidity on its balance sheet, suggesting conservative management of liabilities. Given it has easily adequate short term liquidity, we don't think it will have any issues with its lenders. Succinctly put, AP Memory Technology boasts net cash, so it's fair to say it does not have a heavy debt load!

Check out our latest analysis for AP Memory Technology

Also positive, AP Memory Technology grew its EBIT by 25% in the last year, and that should make it easier to pay down debt, going forward. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if AP Memory Technology can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. While AP Memory 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, AP Memory 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 it is always sensible to investigate a company's debt, in this case AP Memory Technology has NT$8.84b in net cash and a decent-looking balance sheet. And it impressed us with free cash flow of NT$1.5b, being 146% of its EBIT. So is AP Memory Technology's debt a risk? It doesn't seem so to us. 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. Case in point: We've spotted 1 warning sign for AP Memory Technology you should be aware of.

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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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.