Why AP Memory Technology (TWSE:6531) Can Manage Debt Responsibly

David Iben put it nicely when he said “Volatility is not the risk we care about. What we care about is avoiding permanent loss of capital.” So it might be obvious that you need to consider debt, when thinking about the risk of any particular stock, because too much debt can sink a company. The key is to AP Memory Technology Co., Ltd. (TWSE:6531) does have debt, but should shareholders be worried about its use of debt?

What risks does debt pose?

Debt and other liabilities become risky for a company when it cannot easily fulfill its obligations, either with free cash flow or by raising capital at an attractive price. In a worst-case scenario, a company may be unable to pay its creditors and go bankrupt. However, a more frequent (but still costly) occurrence is when a company issues shares at a bargain price, permanently diluting shareholders’ equity, just to shore up its balance sheet. That said, the most common situation is when companies are managing their debt in a reasonable way to work to their own advantage. The first step when considering a company’s debt levels is to consider its cash and debt together.

Read our latest analysis for AP Memory Technology

How much net debt does AP Memory Technology have?

Click on the graph below for the historical numbers. As of March 2024, AP Memory Technology had debt of NT$100m, with no increase over the year. However, the balance sheet lists NT$9.34b in cash, meaning that its actual net cash is NT$9.24b.

How strong is AP Memory Technology’s balance sheet?

From the most recent balance sheet, we can see that AP Memory Technology had liabilities of NT$2.08b due within a year, and liabilities of NT$97.3m due beyond that. Meanwhile, it had cash of NT$9.34b and receivables of NT$454m due within a year, which means that it actually has liabilities of NT$7.62b. more Current assets exceed total liabilities.

This surplus suggests that AP Memory Technology has a conservative balance sheet and will likely be able to eliminate its debt without too much difficulty.Simply put, since AP Memory Technology boasts net cash, it’s fair to say that it isn’t heavily debt-ridden.

Meanwhile, AP Memory Technology’s EBIT fell 20% last year. If this type of performance were to be repeated frequently, we think it could hurt the share price. When analysing debt, it’s important to look at the balance sheet. However, the future profitability of the business will ultimately determine whether AP Memory Technology can strengthen its balance sheet over the long term. For those looking to the future, keep an eye on this. free A report showing analyst profit forecasts.

But that final consideration is also important, because a company can’t pay off debt with paper profits. It needs cash. AP Memory Technology may have net cash on its balance sheet, but it’s still interesting to look at how well the company converts its earnings before interest and tax (EBIT) to free cash flow, because that will affect both its need for debt and its ability to manage it. Fortunately for shareholders, AP Memory Technology has generated more free cash flow than EBIT over the last three years. Nothing beats an inflow of cash to maintain lenders’ confidence.

summary

While investors may understandably be concerned about debt, they should bear in mind that AP Memory Technology has net cash of NT$9.24b, meaning its current assets outweigh its liabilities. Even better, 139% of its EBIT was converted into free cash flow, generating profits of NT$2.3b. So there’s nothing wrong with AP Memory Technology’s use of debt. When analysing debt levels, the balance sheet is the natural starting point. However, not all investment risk resides within the balance sheet. In fact, it doesn’t. For example, AP Memory Technology is: 1. Warning Signs I think you should know.

Of course, if you’re the type of investor who prefers buying stocks without the burden of debt, then be sure to check out our exclusive list of net cash growth stocks today.

Have feedback about this article? Concerns about the content? contact Please contact us directly. Or email editorial-team (at) simplywallst.com.

This article by Simply Wall St is general in nature. We use only unbiased methodologies to provide commentary based on historical data and analyst forecasts, and our articles are not intended as financial advice. It is not a recommendation to buy or sell stocks, and does not take into account your objectives, or your financial situation. We seek to provide long-term focused analysis driven by fundamental data. Note that our analysis may not take into account the latest price sensitive company announcements or qualitative material. Simply Wall St has no position in any of the stocks mentioned.

Have feedback about this article? Concerns about the content? Contact us directly. Or email us at editorial-team@simplywallst.com