Aopen (TPE:3046) Has Debt But No Earnings; Should You Worry?

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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 Aopen Inc. (TPE:3046) does use debt in its business. But the more important question is: how much risk is that debt creating?

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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for Aopen

What Is Aopen's Net Debt?

The image below, which you can click on for greater detail, shows that at September 2020 Aopen had debt of NT$382.8m, up from NT$272.5m in one year. But on the other hand it also has NT$404.7m in cash, leading to a NT$21.9m net cash position.

A Look At Aopen's Liabilities

According to the last reported balance sheet, Aopen had liabilities of NT$855.3m due within 12 months, and liabilities of NT$105.4m due beyond 12 months. Offsetting this, it had NT$404.7m in cash and NT$289.2m in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by NT$266.8m.

This deficit isn't so bad because Aopen is worth NT$1.08b, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. But it's clear that we should definitely closely examine whether it can manage its debt without dilution. While it does have liabilities worth noting, Aopen also has more cash than debt, so we're pretty confident it can manage its debt safely. The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since Aopen will need earnings to service that debt. 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.

In the last year Aopen had a loss before interest and tax, and actually shrunk its revenue by 18%, to NT$1.6b. That's not what we would hope to see.

So How Risky Is Aopen?

We have no doubt that loss making companies are, in general, riskier than profitable ones. And the fact is that over the last twelve months Aopen lost money at the earnings before interest and tax (EBIT) line. And over the same period it saw negative free cash outflow of NT$63m and booked a NT$245m accounting loss. But the saving grace is the NT$21.9m on the balance sheet. That kitty means the company can keep spending for growth for at least two years, at current rates. Overall, we'd say the stock is a bit risky, and we're usually very cautious until we see positive free cash flow. 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. We've identified 1 warning sign with Aopen , and understanding them should be part of your investment process.

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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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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