Accton Technology (TPE:2345) Could Easily Take On More Debt

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' 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. We can see that Accton Technology Corporation (TPE:2345) does use debt in its business. But is this debt a concern to shareholders?

When Is Debt Dangerous?

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. 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for Accton Technology

What Is Accton Technology's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of September 2020 Accton Technology had NT$2.01b of debt, an increase on NT$753.0m, over one year. But it also has NT$8.96b in cash to offset that, meaning it has NT$6.95b net cash.

A Look At Accton Technology's Liabilities

We can see from the most recent balance sheet that Accton Technology had liabilities of NT$13.8b falling due within a year, and liabilities of NT$1.89b due beyond that. On the other hand, it had cash of NT$8.96b and NT$8.16b worth of receivables due within a year. So it actually has NT$1.44b more liquid assets than total liabilities.

Having regard to Accton Technology's size, it seems that its liquid assets are well balanced with its total liabilities. So it's very unlikely that the NT$151.3b company is short on cash, but still worth keeping an eye on the balance sheet. Simply put, the fact that Accton Technology has more cash than debt is arguably a good indication that it can manage its debt safely.

The good news is that Accton Technology has increased its EBIT by 6.2% over twelve months, which should ease any concerns about debt repayment. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if Accton Technology can strengthen its balance sheet over time. 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. Accton Technology 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. During the last three years, Accton Technology produced sturdy free cash flow equating to 68% of its EBIT, about what we'd expect. This cold hard cash means it can reduce its debt when it wants to.

Summing up

While it is always sensible to investigate a company's debt, in this case Accton Technology has NT$6.95b in net cash and a decent-looking balance sheet. And it impressed us with free cash flow of NT$5.2b, being 68% of its EBIT. So is Accton Technology's debt a risk? It doesn't seem so to us. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. For instance, we've identified 1 warning sign for Accton Technology that you should be aware of.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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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