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 should shareholders be worried about its use of debt?
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. 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. 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. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.
See our latest analysis for AXT
What Is AXT's Net Debt?
You can click the graphic below for the historical numbers, but it shows that as of September 2021 AXT had US$14.2m of debt, an increase on US$3.38m, over one year. However, it does have US$49.3m in cash offsetting this, leading to net cash of US$35.1m.
How Strong Is AXT's Balance Sheet?
Zooming in on the latest balance sheet data, we can see that AXT had liabilities of US$37.3m due within 12 months and liabilities of US$4.59m due beyond that. Offsetting these obligations, it had cash of US$49.3m as well as receivables valued at US$36.6m due within 12 months. So it can boast US$43.9m 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!
Although AXT made a loss at the EBIT level, last year, it was also good to see that it generated US$12m in EBIT over the last twelve months. 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, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While AXT has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. During the last year, AXT burned a lot of cash. 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 it is always sensible to investigate a company's debt, in this case AXT has US$35.1m in net cash and a decent-looking balance sheet. So we are not troubled with AXT's debt use. When analysing debt levels, the balance sheet is the obvious place to start. 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 AXT .
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.
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About NasdaqGS:AXTI
AXT
Designs, develops, manufactures, and distributes compound and single element semiconductor substrates.
Reasonable growth potential and fair value.
