Is Asia Pacific Wire & Cable (NASDAQ:APWC) Using Too Much Debt?

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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 Wire & Cable Corporation Limited (NASDAQ:APWC) does use debt in its business. But the real question is whether this debt is making the company risky.

When Is Debt A Problem?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for Asia Pacific Wire & Cable

What Is Asia Pacific Wire & Cable's Debt?

You can click the graphic below for the historical numbers, but it shows that Asia Pacific Wire & Cable had US$49.8m of debt in June 2023, down from US$55.9m, one year before. However, it also had US$39.5m in cash, and so its net debt is US$10.3m.

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$125.4m falling due within a year, and liabilities of US$16.0m due beyond that. Offsetting these obligations, it had cash of US$39.5m as well as receivables valued at US$98.5m due within 12 months. So it has liabilities totalling US$3.37m more than its cash and near-term receivables, combined.

Since publicly traded Asia Pacific Wire & Cable shares are worth a total of US$29.3m, it seems unlikely that this level of liabilities would be a major threat. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time.

In order to size up a company's debt relative to its earnings, we calculate its net debt divided by its earnings before interest, tax, depreciation, and amortization (EBITDA) and its earnings before interest and tax (EBIT) divided by its interest expense (its interest cover). This way, we consider both the absolute quantum of the debt, as well as the interest rates paid on it.

Given net debt is only 1.3 times EBITDA, it is initially surprising to see that Asia Pacific Wire & Cable's EBIT has low interest coverage of 1.6 times. So one way or the other, it's clear the debt levels are not trivial. We also note that Asia Pacific Wire & Cable improved its EBIT from a last year's loss to a positive US$2.8m. There's no doubt that we learn most about debt from the balance sheet. But it is Asia Pacific Wire & Cable'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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. So it is important to check how much of its earnings before interest and tax (EBIT) converts to actual free cash flow. Over the last year, Asia Pacific Wire & Cable recorded free cash flow worth a fulsome 98% of its EBIT, which is stronger than we'd usually expect. That positions it well to pay down debt if desirable to do so.

Our View

The good news is that Asia Pacific Wire & Cable's demonstrated ability to convert EBIT to free cash flow delights us like a fluffy puppy does a toddler. But we must concede we find its interest cover has the opposite effect. Looking at all the aforementioned factors together, it strikes us that Asia Pacific Wire & Cable can handle its debt fairly comfortably. Of course, while this leverage can enhance returns on equity, it does bring more risk, so it's worth keeping an eye on this one. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. Be aware that Asia Pacific Wire & Cable is showing 3 warning signs in our investment analysis , and 1 of those shouldn't be ignored...

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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.