Stock Analysis
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. We note that AUO Corporation (TWSE:2409) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.
When Is Debt A Problem?
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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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, plenty of companies use debt to fund growth, without any negative consequences. 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 AUO
What Is AUO's Debt?
You can click the graphic below for the historical numbers, but it shows that as of June 2024 AUO had NT$122.6b of debt, an increase on NT$114.3b, over one year. On the flip side, it has NT$72.5b in cash leading to net debt of about NT$50.1b.
How Strong Is AUO's Balance Sheet?
Zooming in on the latest balance sheet data, we can see that AUO had liabilities of NT$104.6b due within 12 months and liabilities of NT$137.8b due beyond that. Offsetting these obligations, it had cash of NT$72.5b as well as receivables valued at NT$33.5b due within 12 months. So it has liabilities totalling NT$136.4b more than its cash and near-term receivables, combined.
When you consider that this deficiency exceeds the company's NT$128.8b market capitalization, you might well be inclined to review the balance sheet intently. In the scenario where the company had to clean up its balance sheet quickly, it seems likely shareholders would suffer extensive dilution. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if AUO 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.
Over 12 months, AUO reported revenue of NT$267b, which is a gain of 23%, although it did not report any earnings before interest and tax. Shareholders probably have their fingers crossed that it can grow its way to profits.
Caveat Emptor
Despite the top line growth, AUO still had an earnings before interest and tax (EBIT) loss over the last year. Indeed, it lost NT$11b at the EBIT level. Considering that alongside the liabilities mentioned above make us nervous about the company. We'd want to see some strong near-term improvements before getting too interested in the stock. Not least because it burned through NT$6.1b in negative free cash flow over the last year. So suffice it to say we consider the stock to be 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. Be aware that AUO is showing 1 warning sign in our investment analysis , 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. 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.
About TWSE:2409
AUO
Researches, develops, produces, and sells thin film transistor liquid crystal displays (TFT-LCDs) and other flat panel displays for various applications.