Is Accton Technology (TWSE:2345) Using Too Much Debt?

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. As with many other companies Accton Technology Corporation (TWSE:2345) makes use of debt. But should shareholders be worried about its use of debt?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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, plenty of companies use debt to fund growth, without any negative consequences. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for Accton Technology

What Is Accton Technology's Debt?

As you can see below, Accton Technology had NT$790.9m of debt at June 2024, down from NT$1.02b a year prior. But on the other hand it also has NT$24.3b in cash, leading to a NT$23.5b net cash position.

How Strong Is Accton Technology's Balance Sheet?

We can see from the most recent balance sheet that Accton Technology had liabilities of NT$38.2b falling due within a year, and liabilities of NT$2.54b due beyond that. Offsetting this, it had NT$24.3b in cash and NT$15.1b in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by NT$1.31b.

Having regard to Accton Technology's size, it seems that its liquid assets are well balanced with its total liabilities. So while it's hard to imagine that the NT$317.7b company is struggling for cash, we still think it's worth monitoring its balance sheet. While it does have liabilities worth noting, Accton Technology also has more cash than debt, so we're pretty confident it can manage its debt safely.

Fortunately, Accton Technology grew its EBIT by 3.9% in the last year, making that debt load look even more manageable. The balance sheet is clearly the area to focus on when you are analysing debt. 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, a business needs free cash flow to pay off debt; accounting profits just don't cut it. 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. Over the last three years, Accton Technology 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

We could understand if investors are concerned about Accton Technology's liabilities, but we can be reassured by the fact it has has net cash of NT$23.5b. The cherry on top was that in converted 86% of that EBIT to free cash flow, bringing in NT$12b. So we don't think Accton Technology's use of debt is risky. Over time, share prices tend to follow earnings per share, so if you're interested in Accton Technology, you may well want to click here to check an interactive graph of its earnings per share history.

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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.