Stock Analysis

We Think Azion (GTSM:6148) Can Manage Its Debt With Ease

Source: Shutterstock

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, Azion Corporation (GTSM:6148) does carry debt. But is this debt a concern to shareholders?

When Is Debt Dangerous?

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, debt can be an important tool in businesses, particularly capital heavy businesses. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for Azion

What Is Azion's Net Debt?

As you can see below, at the end of September 2020, Azion had NT$290.9m of debt, up from NT$185.6m a year ago. Click the image for more detail. However, it does have NT$318.1m in cash offsetting this, leading to net cash of NT$27.2m.

GTSM:6148 Debt to Equity History December 22nd 2020

A Look At Azion's Liabilities

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. On the other hand, it had cash of NT$318.1m and NT$358.5m worth of receivables due within a year. So it actually has NT$70.2m more liquid assets than total liabilities.

This surplus suggests that Azion has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Simply put, the fact that Azion has more cash than debt is arguably a good indication that it can manage its debt safely.

In addition to that, we're happy to report that Azion has boosted its EBIT by 90%, thus reducing the spectre of future debt repayments. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Azion will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. 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 we empathize with investors who find debt concerning, you should keep in mind that Azion has net cash of NT$27.2m, as well as more liquid assets than liabilities. 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. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. Case in point: We've spotted 4 warning signs for Azion you should be aware of, and 2 of them are a bit unpleasant.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

If you decide to trade Azion, use the lowest-cost* platform that is rated #1 Overall by Barron’s, Interactive Brokers. Trade stocks, options, futures, forex, bonds and funds on 135 markets, all from a single integrated account. Promoted

Valuation is complex, but we're helping make it simple.

Find out whether Azion is potentially over or undervalued by checking out our comprehensive analysis, which includes fair value estimates, risks and warnings, dividends, insider transactions and financial health.

View the Free Analysis

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 Annual Online Review 2020

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email