The external fund manager backed by Berkshire Hathaway’s Charlie Munger, Li Lu, makes no bones about it when he says ‘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. Importantly, Asia Pacific Wire & Cable Corporation Limited (NASDAQ:APWC) 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 examine debt levels, we first consider both cash and debt levels, together.
What Is Asia Pacific Wire & Cable’s Net Debt?
You can click the graphic below for the historical numbers, but it shows that Asia Pacific Wire & Cable had US$22.3m of debt in September 2019, down from US$31.0m, one year before. However, it does have US$50.7m in cash offsetting this, leading to net cash of US$28.4m.
A Look At Asia Pacific Wire & Cable’s Liabilities
We can see from the most recent balance sheet that Asia Pacific Wire & Cable had liabilities of US$66.5m falling due within a year, and liabilities of US$15.5m due beyond that. Offsetting this, it had US$50.7m in cash and US$93.7m in receivables that were due within 12 months. So it can boast US$62.4m more liquid assets than total liabilities.
This surplus liquidity suggests that Asia Pacific Wire & Cable’s balance sheet could take a hit just as well as Homer Simpson’s head can take a punch. On this basis we think its balance sheet is strong like a sleek panther or even a proud lion. Succinctly put, Asia Pacific Wire & Cable 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 Wire & Cable’s earnings that will influence how the balance sheet holds up in the future. 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.
In the last year Asia Pacific Wire & Cable had negative earnings before interest and tax, and actually shrunk its revenue by 22%, to US$357m. That makes us nervous, to say the least.
So How Risky Is Asia Pacific Wire & Cable?
While Asia Pacific Wire & Cable lost money on an earnings before interest and tax (EBIT) level, it actually generated positive free cash flow US$8.1m. So taking that on face value, and considering the net cash situation, we don’t think that the stock is too risky in the near term. There’s no doubt the next few years will be crucial to how the business matures. 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. For instance, we’ve identified 2 warning signs for Asia Pacific Wire & Cable that you should be aware of.
If, after all that, you’re more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.
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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