David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital. 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. Importantly, Asia Pacific Telecom Co.,Ltd. (TPE:3682) does carry debt. But is this debt a concern to shareholders?
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. 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. When we think about a company's use of debt, we first look at cash and debt together.
What Is Asia Pacific TelecomLtd's Net Debt?
The image below, which you can click on for greater detail, shows that at December 2019 Asia Pacific TelecomLtd had debt of NT$2.30b, up from NT$1.13b in one year. But on the other hand it also has NT$8.22b in cash, leading to a NT$5.92b net cash position.
How Healthy Is Asia Pacific TelecomLtd's Balance Sheet?
We can see from the most recent balance sheet that Asia Pacific TelecomLtd had liabilities of NT$7.32b falling due within a year, and liabilities of NT$2.68b due beyond that. Offsetting this, it had NT$8.22b in cash and NT$1.89b in receivables that were due within 12 months. So these liquid assets roughly match the total liabilities.
This state of affairs indicates that Asia Pacific TelecomLtd's balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So while it's hard to imagine that the NT$16.9b company is struggling for cash, we still think it's worth monitoring its balance sheet. Succinctly put, Asia Pacific TelecomLtd 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 it is Asia Pacific TelecomLtd's earnings that will influence how the balance sheet holds up in the future. 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 TelecomLtd had negative earnings before interest and tax, and actually shrunk its revenue by 2.2%, to NT$14b. That's not what we would hope to see.
So How Risky Is Asia Pacific TelecomLtd?
We have no doubt that loss making companies are, in general, riskier than profitable ones. And in the last year Asia Pacific TelecomLtd had negative earnings before interest and tax (EBIT), truth be told. And over the same period it saw negative free cash outflow of NT$1.3b and booked a NT$5.2b accounting loss. But the saving grace is the NT$5.92b on the balance sheet. That kitty means the company can keep spending for growth for at least two years, at current rates. Even though its balance sheet seems sufficiently liquid, debt always makes us a little nervous if a company doesn't produce free cash flow regularly. 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. For example, we've discovered 3 warning signs for Asia Pacific TelecomLtd that you should be aware of before investing here.
At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.
If you spot an error that warrants correction, please contact the editor at firstname.lastname@example.org. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned.
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