Here's Why AXT (NASDAQ:AXTI) Can Manage Its Debt Responsibly

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. We can see that AXT, Inc. (NASDAQ:AXTI) 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 assists a business until the business has trouble paying it off, either with new capital or with free cash flow. If things get really bad, the lenders can take control of the business. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for AXT

What Is AXT's Debt?

You can click the graphic below for the historical numbers, but it shows that as of December 2021 AXT had US$14.1m of debt, an increase on US$10.4m, over one year. However, it does have US$42.2m in cash offsetting this, leading to net cash of US$28.1m.

How Strong Is AXT's Balance Sheet?

We can see from the most recent balance sheet that AXT had liabilities of US$47.8m falling due within a year, and liabilities of US$4.39m due beyond that. Offsetting this, it had US$42.2m in cash and US$34.8m in receivables that were due within 12 months. So it actually has US$24.8m more liquid assets than total liabilities.

This short term liquidity is a sign that AXT could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, AXT boasts net cash, so it's fair to say it does not have a heavy debt load!

Better yet, AXT grew its EBIT by 227% last year, which is an impressive improvement. If maintained that growth will make the debt even more manageable in the years ahead. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine AXT's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. AXT may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. Over the last two years, AXT saw substantial negative free cash flow, in total. While investors are no doubt expecting a reversal of that situation in due course, it clearly does mean its use of debt is more risky.

Summing up

While we empathize with investors who find debt concerning, you should keep in mind that AXT has net cash of US$28.1m, as well as more liquid assets than liabilities. And we liked the look of last year's 227% year-on-year EBIT growth. So we are not troubled with AXT's debt use. 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. These risks can be hard to spot. Every company has them, and we've spotted 3 warning signs for AXT (of which 1 doesn't sit too well with us!) you should know about.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.