These 4 Measures Indicate That Alpha Networks (TWSE:3380) Is Using Debt Reasonably Well

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. Importantly, Alpha Networks Inc. (TWSE:3380) does carry debt. But is this debt a concern to shareholders?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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 think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for Alpha Networks

What Is Alpha Networks's Net Debt?

The image below, which you can click on for greater detail, shows that Alpha Networks had debt of NT$2.79b at the end of September 2024, a reduction from NT$3.37b over a year. However, it does have NT$5.24b in cash offsetting this, leading to net cash of NT$2.45b.

A Look At Alpha Networks' Liabilities

Zooming in on the latest balance sheet data, we can see that Alpha Networks had liabilities of NT$9.20b due within 12 months and liabilities of NT$1.29b due beyond that. Offsetting this, it had NT$5.24b in cash and NT$3.58b in receivables that were due within 12 months. So its liabilities total NT$1.68b more than the combination of its cash and short-term receivables.

Given Alpha Networks has a market capitalization of NT$20.7b, it's hard to believe these liabilities pose much threat. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. While it does have liabilities worth noting, Alpha Networks also has more cash than debt, so we're pretty confident it can manage its debt safely.

Shareholders should be aware that Alpha Networks's EBIT was down 85% last year. If that decline continues then paying off debt will be harder than selling foie gras at a vegan convention. 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 Alpha Networks 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. While Alpha Networks 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. Happily for any shareholders, Alpha Networks actually produced more free cash flow than EBIT over the last three years. There's nothing better than incoming cash when it comes to staying in your lenders' good graces.

Summing Up

While it is always sensible to look at a company's total liabilities, it is very reassuring that Alpha Networks has NT$2.45b in net cash. The cherry on top was that in converted 132% of that EBIT to free cash flow, bringing in NT$1.5b. So we are not troubled with Alpha Networks's debt use. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. These risks can be hard to spot. Every company has them, and we've spotted 2 warning signs for Alpha Networks you should know about.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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.