Does Asia Pacific Telecom (TPE:3682) Have A Healthy Balance Sheet?

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. Importantly, Asia Pacific Telecom Co., Ltd. (TPE:3682) does carry debt. But is this debt a concern to shareholders?

When Is Debt A Problem?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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, debt can be an important tool in businesses, particularly capital heavy businesses. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for Asia Pacific Telecom

How Much Debt Does Asia Pacific Telecom Carry?

You can click the graphic below for the historical numbers, but it shows that Asia Pacific Telecom had NT$1.43b of debt in September 2020, down from NT$5.25b, one year before. However, its balance sheet shows it holds NT$6.28b in cash, so it actually has NT$4.85b net cash.

How Healthy Is Asia Pacific Telecom's Balance Sheet?

According to the last reported balance sheet, Asia Pacific Telecom had liabilities of NT$6.19b due within 12 months, and liabilities of NT$2.73b due beyond 12 months. Offsetting these obligations, it had cash of NT$6.28b as well as receivables valued at NT$1.62b due within 12 months. So its liabilities total NT$1.01b more than the combination of its cash and short-term receivables.

Given Asia Pacific Telecom has a market capitalization of NT$36.7b, 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. Despite its noteworthy liabilities, Asia Pacific Telecom boasts net cash, so it's fair to say it does not have a heavy debt load! When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Asia Pacific Telecom will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

In the last year Asia Pacific Telecom had a loss before interest and tax, and actually shrunk its revenue by 3.6%, to NT$14b. We would much prefer see growth.

So How Risky Is Asia Pacific Telecom?

By their very nature companies that are losing money are more risky than those with a long history of profitability. And in the last year Asia Pacific Telecom had an earnings before interest and tax (EBIT) loss, truth be told. And over the same period it saw negative free cash outflow of NT$290m and booked a NT$5.6b accounting loss. While this does make the company a bit risky, it's important to remember it has net cash of NT$4.85b. That means it could keep spending at its current rate for more than two years. Overall, we'd say the stock is a bit risky, and we're usually very cautious until we see positive free cash flow. 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. Case in point: We've spotted 3 warning signs for Asia Pacific Telecom you should be aware of, and 1 of them can't be ignored.

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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