AVer Information (TPE:3669) Has A Rock Solid Balance Sheet

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.' 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. Importantly, AVer Information Inc. (TPE:3669) does carry debt. But should shareholders be worried about its use of debt?

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. 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

View our latest analysis for AVer Information

What Is AVer Information's Debt?

The image below, which you can click on for greater detail, shows that at December 2020 AVer Information had debt of NT$228.2m, up from none in one year. But on the other hand it also has NT$1.85b in cash, leading to a NT$1.62b net cash position.

How Healthy Is AVer Information's Balance Sheet?

According to the last reported balance sheet, AVer Information had liabilities of NT$1.34b due within 12 months, and liabilities of NT$135.2m due beyond 12 months. On the other hand, it had cash of NT$1.85b and NT$568.7m worth of receivables due within a year. So it can boast NT$940.8m more liquid assets than total liabilities.

This surplus suggests that AVer Information has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Simply put, the fact that AVer Information has more cash than debt is arguably a good indication that it can manage its debt safely.

Even more impressive was the fact that AVer Information grew its EBIT by 1,324% over twelve months. If maintained that growth will make the debt even more manageable in the years ahead. There's no doubt that we learn most about debt from the balance sheet. But it is AVer Information'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 business needs free cash flow to pay off debt; accounting profits just don't cut it. AVer Information 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. Over the last three years, AVer Information recorded free cash flow worth a fulsome 86% of its EBIT, which is stronger than we'd usually expect. That positions it well to pay down debt if desirable to do so.

Summing up

While it is always sensible to investigate a company's debt, in this case AVer Information has NT$1.62b in net cash and a decent-looking balance sheet. And it impressed us with free cash flow of NT$711m, being 86% of its EBIT. So is AVer Information'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. But ultimately, every company can contain risks that exist outside of the balance sheet. We've identified 1 warning sign with AVer Information , and understanding them should be part of your investment process.

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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