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.' 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. Importantly, Apex International Financial Engineering Res. & Tech. Co., Ltd (GTSM:5210) does carry debt. But the more important question is: how much risk is that debt creating?
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. If things get really bad, the lenders can take control of the business. 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, 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 Apex International Financial Engineering Res. & Tech's Debt?
As you can see below, Apex International Financial Engineering Res. & Tech had NT$46.0m of debt at June 2020, down from NT$76.0m a year prior. However, its balance sheet shows it holds NT$204.2m in cash, so it actually has NT$158.2m net cash.
How Healthy Is Apex International Financial Engineering Res. & Tech's Balance Sheet?
Zooming in on the latest balance sheet data, we can see that Apex International Financial Engineering Res. & Tech had liabilities of NT$110.2m due within 12 months and liabilities of NT$24.8m due beyond that. Offsetting this, it had NT$204.2m in cash and NT$65.2m in receivables that were due within 12 months. So it actually has NT$134.5m more liquid assets than total liabilities.
This surplus suggests that Apex International Financial Engineering Res. & Tech is using debt in a way that is appears to be both safe and conservative. Because it has plenty of assets, it is unlikely to have trouble with its lenders. Simply put, the fact that Apex International Financial Engineering Res. & Tech has more cash than debt is arguably a good indication that it can manage its debt safely. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Apex International Financial Engineering Res. & Tech 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.
Over 12 months, Apex International Financial Engineering Res. & Tech made a loss at the EBIT level, and saw its revenue drop to NT$236m, which is a fall of 22%. That makes us nervous, to say the least.
So How Risky Is Apex International Financial Engineering Res. & Tech?
Statistically speaking companies that lose money are riskier than those that make money. And we do note that Apex International Financial Engineering Res. & Tech had an earnings before interest and tax (EBIT) loss, over the last year. Indeed, in that time it burnt through NT$71m of cash and made a loss of NT$52m. But the saving grace is the NT$158.2m on the balance sheet. That means it could keep spending at its current rate for more than two years. Overall, its balance sheet doesn't seem overly risky, at the moment, but we're always cautious until we see the positive free cash flow. 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. Be aware that Apex International Financial Engineering Res. & Tech is showing 2 warning signs in our investment analysis , and 1 of those is potentially serious...
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.
When trading Apex International Financial Engineering Res. & Tech or any other investment, use the platform considered by many to be the Professional's Gateway to the Worlds Market, Interactive Brokers. You get the lowest-cost* trading on stocks, options, futures, forex, bonds and funds worldwide from a single integrated account.
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.
*Interactive Brokers Rated Lowest Cost Broker by StockBrokers.com Annual Online Review 2020
Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email email@example.com.