Is Aurotek (TWSE:6215) A Risky Investment?

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.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. Importantly, Aurotek Corporation (TWSE:6215) does carry debt. But the real question is whether this debt is making the company risky.

What Risk Does Debt Bring?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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, 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 examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for Aurotek

What Is Aurotek's Debt?

You can click the graphic below for the historical numbers, but it shows that as of September 2024 Aurotek had NT$115.0m of debt, an increase on NT$20.0m, over one year. However, it does have NT$541.0m in cash offsetting this, leading to net cash of NT$426.0m.

How Strong Is Aurotek's Balance Sheet?

We can see from the most recent balance sheet that Aurotek had liabilities of NT$479.3m falling due within a year, and liabilities of NT$61.2m due beyond that. On the other hand, it had cash of NT$541.0m and NT$536.1m worth of receivables due within a year. So it can boast NT$536.6m more liquid assets than total liabilities.

This short term liquidity is a sign that Aurotek could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, Aurotek boasts net cash, so it's fair to say it does not have a heavy debt load!

Better yet, Aurotek grew its EBIT by 120% last year, which is an impressive improvement. If maintained that growth will make the debt even more manageable in the years ahead. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Aurotek 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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. Aurotek 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. Happily for any shareholders, Aurotek actually produced more free cash flow than EBIT over the last three years. That sort of strong cash generation warms our hearts like a puppy in a bumblebee suit.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Aurotek has net cash of NT$426.0m, as well as more liquid assets than liabilities. The cherry on top was that in converted 164% of that EBIT to free cash flow, bringing in NT$34m. So is Aurotek's debt a risk? It doesn't seem so to us. 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. For instance, we've identified 1 warning sign for Aurotek that you should be aware of.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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.