Warren Buffett famously said, 'Volatility is far from synonymous with risk.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. As with many other companies Appotronics Corporation Limited (SHSE:688007) makes use of debt. But the more important question is: how much risk is that debt creating?
What Risk Does Debt Bring?
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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. 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.
What Is Appotronics's Net Debt?
As you can see below, at the end of September 2023, Appotronics had CN¥785.3m of debt, up from CN¥681.0m a year ago. Click the image for more detail. However, it does have CN¥1.84b in cash offsetting this, leading to net cash of CN¥1.05b.
A Look At Appotronics' Liabilities
According to the last reported balance sheet, Appotronics had liabilities of CN¥916.2m due within 12 months, and liabilities of CN¥548.8m due beyond 12 months. On the other hand, it had cash of CN¥1.84b and CN¥276.6m worth of receivables due within a year. So it actually has CN¥648.5m more liquid assets than total liabilities.
This short term liquidity is a sign that Appotronics could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, Appotronics boasts net cash, so it's fair to say it does not have a heavy debt load!
It was also good to see that despite losing money on the EBIT line last year, Appotronics turned things around in the last 12 months, delivering and EBIT of CN¥35m. The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine Appotronics's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.
Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. While Appotronics 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. Over the last year, Appotronics actually produced more free cash flow than EBIT. That sort of strong cash conversion gets us as excited as the crowd when the beat drops at a Daft Punk concert.
Summing Up
While we empathize with investors who find debt concerning, you should keep in mind that Appotronics has net cash of CN¥1.05b, as well as more liquid assets than liabilities. The cherry on top was that in converted 704% of that EBIT to free cash flow, bringing in CN¥244m. So we don't think Appotronics's use of debt is risky. Over time, share prices tend to follow earnings per share, so if you're interested in Appotronics, you may well want to click here to check an interactive graph of its earnings per share history.
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.
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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.
