We Think Auden Techno (TWSE:3138) Can Stay On Top Of Its Debt

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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. As with many other companies Auden Techno Corp. (TWSE:3138) makes use of debt. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for Auden Techno

What Is Auden Techno's Net Debt?

As you can see below, Auden Techno had NT$623.0m of debt, at September 2024, which is about the same as the year before. You can click the chart for greater detail. But it also has NT$1.24b in cash to offset that, meaning it has NT$617.3m net cash.

How Strong Is Auden Techno's Balance Sheet?

We can see from the most recent balance sheet that Auden Techno had liabilities of NT$1.20b falling due within a year, and liabilities of NT$164.6m due beyond that. Offsetting this, it had NT$1.24b in cash and NT$464.9m in receivables that were due within 12 months. So it can boast NT$344.6m more liquid assets than total liabilities.

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

On the other hand, Auden Techno's EBIT dived 19%, over the last year. If that rate of decline in earnings continues, the company could find itself in a tight spot. When analysing debt levels, the balance sheet is the obvious place to start. But it is Auden Techno's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. Auden Techno 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. Looking at the most recent three years, Auden Techno recorded free cash flow of 30% of its EBIT, which is weaker than we'd expect. That weak cash conversion makes it more difficult to handle indebtedness.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Auden Techno has net cash of NT$617.3m, as well as more liquid assets than liabilities. 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. However, not all investment risk resides within the balance sheet - far from it. Be aware that Auden Techno is showing 3 warning signs 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.