We Think AboCom Systems (TPE:2444) Has A Fair Chunk Of 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.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. Importantly, AboCom Systems, Inc. (TPE:2444) does carry debt. But is this debt a concern to shareholders?

Why Does Debt Bring Risk?

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 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. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

See our latest analysis for AboCom Systems

How Much Debt Does AboCom Systems Carry?

You can click the graphic below for the historical numbers, but it shows that as of December 2020 AboCom Systems had NT$515.4m of debt, an increase on NT$400.8m, over one year. On the flip side, it has NT$213.0m in cash leading to net debt of about NT$302.4m.

How Strong Is AboCom Systems' Balance Sheet?

Zooming in on the latest balance sheet data, we can see that AboCom Systems had liabilities of NT$973.3m due within 12 months and liabilities of NT$30.0m due beyond that. Offsetting these obligations, it had cash of NT$213.0m as well as receivables valued at NT$272.8m due within 12 months. So its liabilities total NT$517.5m more than the combination of its cash and short-term receivables.

AboCom Systems has a market capitalization of NT$1.66b, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. However, it is still worthwhile taking a close look at its ability to pay off debt. The balance sheet is clearly the area to focus on when you are analysing debt. But it is AboCom Systems'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.

Over 12 months, AboCom Systems reported revenue of NT$1.8b, which is a gain of 12%, although it did not report any earnings before interest and tax. We usually like to see faster growth from unprofitable companies, but each to their own.

Caveat Emptor

Importantly, AboCom Systems had an earnings before interest and tax (EBIT) loss over the last year. Indeed, it lost NT$78m at the EBIT level. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. However, it doesn't help that it burned through NT$30m of cash over the last year. So to be blunt we think it is risky. 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. We've identified 2 warning signs with AboCom Systems (at least 1 which doesn't sit too well with us) , and understanding them should be part of your investment process.

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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