Is Azion (GTSM:6148) A Risky Investment?

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 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. As with many other companies Azion Corporation (GTSM:6148) makes use of debt. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for Azion

How Much Debt Does Azion Carry?

You can click the graphic below for the historical numbers, but it shows that as of September 2020 Azion had NT$290.9m of debt, an increase on NT$185.6m, over one year. But it also has NT$318.1m in cash to offset that, meaning it has NT$27.2m net cash.

How Strong Is Azion's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Azion had liabilities of NT$421.7m due within 12 months and liabilities of NT$184.7m due beyond that. Offsetting this, it had NT$318.1m in cash and NT$358.5m in receivables that were due within 12 months. So it can boast NT$70.2m more liquid assets than total liabilities.

This short term liquidity is a sign that Azion could probably pay off its debt with ease, as its balance sheet is far from stretched. Simply put, the fact that Azion has more cash than debt is arguably a good indication that it can manage its debt safely.

On top of that, Azion grew its EBIT by 90% over the last twelve months, and that growth will make it easier to handle its debt. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Azion 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, a company can only pay off debt with cold hard cash, not accounting profits. Azion 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, Azion actually produced more free cash flow than EBIT over the last three years. 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 Azion has NT$27.2m in net cash and a decent-looking balance sheet. The cherry on top was that in converted 164% of that EBIT to free cash flow, bringing in NT$1.3m. So is Azion'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. For example Azion has 3 warning signs (and 2 which are a bit concerning) we think you should know about.

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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