Axiomtek (GTSM:3088) Seems To Use Debt Quite Sensibly

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 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 Axiomtek Co., Ltd. (GTSM:3088) makes use of debt. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. 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. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for Axiomtek

How Much Debt Does Axiomtek Carry?

As you can see below, Axiomtek had NT$317.4m of debt at December 2020, down from NT$468.3m a year prior. But it also has NT$907.8m in cash to offset that, meaning it has NT$590.4m net cash.

A Look At Axiomtek's Liabilities

Zooming in on the latest balance sheet data, we can see that Axiomtek had liabilities of NT$1.10b due within 12 months and liabilities of NT$309.6m due beyond that. Offsetting these obligations, it had cash of NT$907.8m as well as receivables valued at NT$734.3m due within 12 months. So it can boast NT$232.3m more liquid assets than total liabilities.

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

On the other hand, Axiomtek's EBIT dived 19%, over the last year. If that rate of decline in earnings continues, the company could find itself in a tight spot. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Axiomtek's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While Axiomtek has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. Over the most recent three years, Axiomtek recorded free cash flow worth 79% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This free cash flow puts the company in a good position to pay down debt, when appropriate.

Summing up

While we empathize with investors who find debt concerning, you should keep in mind that Axiomtek has net cash of NT$590.4m, as well as more liquid assets than liabilities. And it impressed us with free cash flow of NT$498m, being 79% of its EBIT. So we are not troubled with Axiomtek's debt use. 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, we've discovered 3 warning signs for Axiomtek (1 is a bit unpleasant!) that you should be aware of before investing here.

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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