Is Auden Techno (TWSE:3138) Using Too Much Debt?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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 can see that Auden Techno Corp. (TWSE:3138) does use debt in its business. But the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. 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 Auden Techno

What Is Auden Techno's Debt?

As you can see below, Auden Techno had NT$553.4m of debt at March 2024, down from NT$582.6m a year prior. But on the other hand it also has NT$1.51b in cash, leading to a NT$959.6m net cash position.

How Healthy Is Auden Techno's Balance Sheet?

According to the last reported balance sheet, Auden Techno had liabilities of NT$1.24b due within 12 months, and liabilities of NT$171.8m due beyond 12 months. Offsetting this, it had NT$1.51b in cash and NT$424.7m in receivables that were due within 12 months. So it actually has NT$527.6m more liquid assets than total liabilities.

This short term liquidity is a sign that Auden Techno could probably pay off its debt with ease, as its balance sheet is far from stretched. Simply put, the fact that Auden Techno has more cash than debt is arguably a good indication that it can manage its debt safely.

Another good sign is that Auden Techno has been able to increase its EBIT by 24% in twelve months, making it easier to pay down debt. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Auden Techno 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, a company can only pay off debt with cold hard cash, not accounting profits. While Auden Techno 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. Considering the last three years, Auden Techno actually recorded a cash outflow, overall. Debt is far more risky for companies with unreliable free cash flow, so shareholders should be hoping that the past expenditure will produce free cash flow in the future.

Summing Up

While it is always sensible to investigate a company's debt, in this case Auden Techno has NT$959.6m in net cash and a decent-looking balance sheet. And we liked the look of last year's 24% year-on-year EBIT growth. So we don't have any problem with Auden Techno's use of debt. 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 4 warning signs with Auden Techno (at least 1 which shouldn't be ignored) , and understanding them should be part of your investment process.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.

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