Is Asia Pacific Telecom (TPE:3682) Using Debt In A Risky Way?

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. We can see that Asia Pacific Telecom Co., Ltd. (TPE:3682) does use debt in its business. But the more important question is: how much risk is that debt creating?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. 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.

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. But on the other hand it also has NT$6.28b in cash, leading to a NT$4.85b net cash position.

How Healthy Is Asia Pacific Telecom's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Asia Pacific Telecom had liabilities of NT$6.19b due within 12 months and liabilities of NT$2.73b due beyond that. 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 outweigh the sum of its cash and (near-term) receivables by NT$1.01b.

Given Asia Pacific Telecom has a market capitalization of NT$36.6b, it's hard to believe these liabilities pose much threat. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. While it does have liabilities worth noting, Asia Pacific Telecom also has more cash than debt, so we're pretty confident it can manage its debt safely. The balance sheet is clearly the area to focus on when you are analysing debt. 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 the fact is that over the last twelve months Asia Pacific Telecom lost money at the earnings before interest and tax (EBIT) line. Indeed, in that time it burnt through NT$290m of cash and made a loss of NT$5.6b. 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. Summing up, we're a little skeptical of this one, as it seems fairly risky in the absence of free cashflow. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. To that end, you should be aware of the 2 warning signs we've spotted with Asia Pacific Telecom .

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.

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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. 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.
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