Here's Why AP Memory Technology (TWSE:6531) Can Manage Its Debt Responsibly

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 might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. Importantly, AP Memory Technology Corporation (TWSE:6531) does carry debt. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for AP Memory Technology

What Is AP Memory Technology's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of March 2024 AP Memory Technology had NT$100.0m of debt, an increase on none, over one year. However, its balance sheet shows it holds NT$9.34b in cash, so it actually has NT$9.24b net cash.

How Strong Is AP Memory Technology's Balance Sheet?

We can see from the most recent balance sheet that AP Memory Technology had liabilities of NT$2.08b falling due within a year, and liabilities of NT$97.3m due beyond that. On the other hand, it had cash of NT$9.34b and NT$454.0m worth of receivables due within a year. So it actually has NT$7.62b more liquid assets than total liabilities.

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

On the other hand, AP Memory Technology's EBIT dived 20%, over the last year. We think hat kind of performance, if repeated frequently, could well lead to difficulties for the stock. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if AP Memory Technology can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. AP Memory Technology may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. Happily for any shareholders, AP Memory Technology actually produced more free cash flow than EBIT over the last three years. There's nothing better than incoming cash when it comes to staying in your lenders' good graces.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that AP Memory Technology has net cash of NT$9.24b, as well as more liquid assets than liabilities. The cherry on top was that in converted 139% of that EBIT to free cash flow, bringing in NT$2.3b. So we don't have any problem with AP Memory Technology's use of debt. 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 example - AP Memory Technology has 1 warning sign we think you should be aware of.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com