Is AVer Information (TPE:3669) 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.' 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 AVer Information Inc. (TPE:3669) does use debt in its business. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for AVer Information

What Is AVer Information's Net Debt?

The image below, which you can click on for greater detail, shows that at September 2020 AVer Information had debt of NT$228.8m, up from none in one year. However, it does have NT$1.44b in cash offsetting this, leading to net cash of NT$1.21b.

How Strong Is AVer Information's Balance Sheet?

We can see from the most recent balance sheet that AVer Information had liabilities of NT$1.69b falling due within a year, and liabilities of NT$136.4m due beyond that. Offsetting these obligations, it had cash of NT$1.44b as well as receivables valued at NT$998.4m due within 12 months. So it can boast NT$607.6m more liquid assets than total liabilities.

This short term liquidity is a sign that AVer Information could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, AVer Information boasts net cash, so it's fair to say it does not have a heavy debt load!

Even more impressive was the fact that AVer Information grew its EBIT by 1,299% 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 you can't view debt in total isolation; since AVer Information 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.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While AVer Information 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. During the last three years, AVer Information produced sturdy free cash flow equating to 71% of its EBIT, about what we'd expect. This free cash flow puts the company in a good position to pay down debt, when appropriate.

Summing up

While it is always sensible to investigate a company's debt, in this case AVer Information has NT$1.21b in net cash and a decent-looking balance sheet. And it impressed us with its EBIT growth of 1,299% over the last year. 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. Consider risks, for instance. Every company has them, and we've spotted 1 warning sign for AVer Information you should know about.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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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