Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. As with many other companies Asia Pacific Telecom Co.,Ltd. (TPE:3682) makes use of debt. But the real question is whether this debt is making the company risky.
When Is Debt A Problem?
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. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first step when considering a company's debt levels is to consider its cash and debt together.
See our latest analysis for Asia Pacific TelecomLtd
How Much Debt Does Asia Pacific TelecomLtd Carry?
As you can see below, Asia Pacific TelecomLtd had NT$1.60b of debt at March 2020, down from NT$1.71b a year prior. But on the other hand it also has NT$7.38b in cash, leading to a NT$5.78b net cash position.
How Healthy Is Asia Pacific TelecomLtd's Balance Sheet?
The latest balance sheet data shows that Asia Pacific TelecomLtd had liabilities of NT$6.40b due within a year, and liabilities of NT$2.84b falling due after that. On the other hand, it had cash of NT$7.38b and NT$1.87b worth of receivables due within a year. So its total liabilities are just about perfectly matched by its shorter-term, liquid assets.
Having regard to Asia Pacific TelecomLtd's size, it seems that its liquid assets are well balanced with its total liabilities. So while it's hard to imagine that the NT$18.4b 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! 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 TelecomLtd 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.
Over 12 months, Asia Pacific TelecomLtd made a loss at the EBIT level, and saw its revenue drop to NT$14b, which is a fall of 2.2%. That's not what we would hope to see.
So How Risky Is Asia Pacific TelecomLtd?
Statistically speaking companies that lose money are riskier than those that make money. And we do note that Asia Pacific TelecomLtd had negative earnings before interest and tax (EBIT), over the last year. And over the same period it saw negative free cash outflow of NT$1.5b and booked a NT$5.3b accounting loss. While this does make the company a bit risky, it's important to remember it has net cash of NT$5.78b. That kitty means the company can keep spending for growth for at least two years, at current rates. Overall, its balance sheet doesn't seem overly risky, at the moment, but we're always cautious until we see the positive free cash flow. For riskier companies like Asia Pacific TelecomLtd I always like to keep an eye on the long term profit and revenue trends. Fortunately, you can click to see our interactive graph of its profit, revenue, and operating cashflow.
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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