Here's Why AAEON Technology (TWSE:6579) Can Manage Its Debt Responsibly

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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, AAEON Technology Inc. (TWSE:6579) does carry debt. But the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

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 usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for AAEON Technology

How Much Debt Does AAEON Technology Carry?

You can click the graphic below for the historical numbers, but it shows that as of March 2024 AAEON Technology had NT$169.4m of debt, an increase on NT$152.7m, over one year. However, its balance sheet shows it holds NT$5.79b in cash, so it actually has NT$5.62b net cash.

A Look At AAEON Technology's Liabilities

We can see from the most recent balance sheet that AAEON Technology had liabilities of NT$2.07b falling due within a year, and liabilities of NT$602.4m due beyond that. Offsetting this, it had NT$5.79b in cash and NT$900.3m in receivables that were due within 12 months. So it actually has NT$4.02b more liquid assets than total liabilities.

This surplus suggests that AAEON Technology has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, AAEON Technology boasts net cash, so it's fair to say it does not have a heavy debt load!

In fact AAEON Technology's saving grace is its low debt levels, because its EBIT has tanked 30% in the last twelve months. Falling earnings (if the trend continues) could eventually make even modest debt quite risky. The balance sheet is clearly the area to focus on when you are analysing debt. But it is AAEON Technology's earnings that will influence how the balance sheet holds up in the future. 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 business needs free cash flow to pay off debt; accounting profits just don't cut it. While AAEON Technology 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. Over the last three years, AAEON Technology recorded free cash flow worth a fulsome 87% of its EBIT, which is stronger than we'd usually expect. That puts it in a very strong position to pay down debt.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that AAEON Technology has net cash of NT$5.62b, as well as more liquid assets than liabilities. And it impressed us with free cash flow of NT$2.1b, being 87% of its EBIT. So we are not troubled with AAEON Technology's debt use. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. These risks can be hard to spot. Every company has them, and we've spotted 2 warning signs for AAEON Technology 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.

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

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.