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David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' 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 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 usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. 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.
How Much Debt Does AXT Carry?
The image below, which you can click on for greater detail, shows that at March 2021 AXT had debt of US$10.4m, up from US$6.07m in one year. But on the other hand it also has US$61.4m in cash, leading to a US$51.1m net cash position.
A Look At AXT's Liabilities
Zooming in on the latest balance sheet data, we can see that AXT had liabilities of US$39.5m due within 12 months and liabilities of US$3.76m due beyond that. On the other hand, it had cash of US$61.4m and US$28.4m worth of receivables due within a year. So it can boast US$46.6m more liquid assets than total liabilities.
This surplus suggests that AXT has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, AXT 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, AXT turned things around in the last 12 months, delivering and EBIT of US$8.1m. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if AXT can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.
But our final consideration is also important, because a company cannot pay debt with paper profits; it needs 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 that may be a result of expenditure for growth, it does make the debt far more risky.
While we empathize with investors who find debt concerning, you should keep in mind that AXT has net cash of US$51.1m, as well as more liquid assets than liabilities. So we don't have any problem with AXT's use of debt. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. For instance, we've identified 3 warning signs for AXT that you should be aware of.
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.
This article by Simply Wall St is general in nature. 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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