Is Aplex Technology (GTSM:6570) A Risky Investment?

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. We note that Aplex Technology Inc. (GTSM:6570) does have debt on its balance sheet. But is this debt a concern to shareholders?

When Is Debt Dangerous?

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. 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.

View our latest analysis for Aplex Technology

How Much Debt Does Aplex Technology Carry?

As you can see below, at the end of September 2020, Aplex Technology had NT$120.5m of debt, up from NT$100.5m a year ago. Click the image for more detail. However, its balance sheet shows it holds NT$230.6m in cash, so it actually has NT$110.1m net cash.

How Strong Is Aplex Technology's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Aplex Technology had liabilities of NT$171.7m due within 12 months and liabilities of NT$115.0m due beyond that. Offsetting these obligations, it had cash of NT$230.6m as well as receivables valued at NT$61.9m due within 12 months. So it actually has NT$5.89m more liquid assets than total liabilities.

Having regard to Aplex Technology's size, it seems that its liquid assets are well balanced with its total liabilities. So while it's hard to imagine that the NT$968.5m company is struggling for cash, we still think it's worth monitoring its balance sheet. Succinctly put, Aplex Technology boasts net cash, so it's fair to say it does not have a heavy debt load!

The modesty of its debt load may become crucial for Aplex Technology if management cannot prevent a repeat of the 47% cut to EBIT over the last year. When it comes to paying off debt, falling earnings are no more useful than sugary sodas are for your health. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Aplex Technology'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 company can only pay off debt with cold hard cash, not accounting profits. While Aplex Technology 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. Considering the last three years, Aplex Technology actually recorded a cash outflow, overall. Debt is far more risky for companies with unreliable free cash flow, so shareholders should be hoping that the past expenditure will produce free cash flow in the future.

Summing up

While it is always sensible to investigate a company's debt, in this case Aplex Technology has NT$110.1m in net cash and a decent-looking balance sheet. So although we see some areas for improvement, we're not too worried about Aplex Technology's balance sheet. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. Case in point: We've spotted 3 warning signs for Aplex Technology you should be aware of.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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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