These 4 Measures Indicate That AEWIN TechnologiesLtd (GTSM:3564) Is Using Debt Reasonably Well

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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. We note that AEWIN Technologies Co.,Ltd. (GTSM:3564) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. 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, debt can be an important tool in businesses, particularly capital heavy businesses. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for AEWIN TechnologiesLtd

What Is AEWIN TechnologiesLtd's Net Debt?

As you can see below, at the end of December 2020, AEWIN TechnologiesLtd had NT$64.8m of debt, up from none a year ago. Click the image for more detail. However, it does have NT$177.7m in cash offsetting this, leading to net cash of NT$112.8m.

A Look At AEWIN TechnologiesLtd's Liabilities

The latest balance sheet data shows that AEWIN TechnologiesLtd had liabilities of NT$519.8m due within a year, and liabilities of NT$26.4m falling due after that. On the other hand, it had cash of NT$177.7m and NT$503.9m worth of receivables due within a year. So it actually has NT$135.4m more liquid assets than total liabilities.

This short term liquidity is a sign that AEWIN TechnologiesLtd could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, AEWIN TechnologiesLtd boasts net cash, so it's fair to say it does not have a heavy debt load!

Another good sign is that AEWIN TechnologiesLtd has been able to increase its EBIT by 29% in twelve months, making it easier to pay down debt. When analysing debt levels, the balance sheet is the obvious place to start. But it is AEWIN TechnologiesLtd'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.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. AEWIN TechnologiesLtd 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. In the last two years, AEWIN TechnologiesLtd created free cash flow amounting to 16% of its EBIT, an uninspiring performance. That limp level of cash conversion undermines its ability to manage and pay down debt.

Summing up

While it is always sensible to investigate a company's debt, in this case AEWIN TechnologiesLtd has NT$112.8m in net cash and a decent-looking balance sheet. And we liked the look of last year's 29% year-on-year EBIT growth. So we don't think AEWIN TechnologiesLtd's use of debt is risky. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. For instance, we've identified 3 warning signs for AEWIN TechnologiesLtd (1 is a bit concerning) you should be aware of.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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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