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

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 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 note that AAEON Technology Inc. (TWSE:6579) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

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. If things get really bad, the lenders can take control of the business. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. 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. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for AAEON Technology

What Is AAEON Technology's Debt?

As you can see below, at the end of June 2024, AAEON Technology had NT$166.8m of debt, up from NT$150.1m a year ago. Click the image for more detail. But it also has NT$6.01b in cash to offset that, meaning it has NT$5.84b net cash.

A Look At AAEON Technology's Liabilities

Zooming in on the latest balance sheet data, we can see that AAEON Technology had liabilities of NT$3.26b due within 12 months and liabilities of NT$594.4m due beyond that. Offsetting this, it had NT$6.01b in cash and NT$1.03b in receivables that were due within 12 months. So it can boast NT$3.18b more liquid assets than total liabilities.

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

It is just as well that AAEON Technology's load is not too heavy, because its EBIT was down 29% over the last year. Falling earnings (if the trend continues) could eventually make even modest debt quite risky. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since AAEON Technology 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. 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. Happily for any shareholders, AAEON Technology 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 we empathize with investors who find debt concerning, you should keep in mind that AAEON Technology has net cash of NT$5.84b, as well as more liquid assets than liabilities. And it impressed us with free cash flow of NT$2.0b, being 114% of its EBIT. So we are not troubled with AAEON Technology's debt use. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. Be aware that AAEON Technology is showing 1 warning sign in our investment analysis , you should know about...

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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.