Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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. Importantly, FSP Technology Inc. (TPE:3015) does carry debt. But the more important question is: how much risk is that debt creating?
Why Does Debt Bring Risk?
Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we think about a company's use of debt, we first look at cash and debt together.
Check out our latest analysis for FSP Technology
How Much Debt Does FSP Technology Carry?
As you can see below, at the end of September 2020, FSP Technology had NT$262.9m of debt, up from NT$135.3m a year ago. Click the image for more detail. But on the other hand it also has NT$2.81b in cash, leading to a NT$2.55b net cash position.
How Healthy Is FSP Technology's Balance Sheet?
We can see from the most recent balance sheet that FSP Technology had liabilities of NT$6.53b falling due within a year, and liabilities of NT$570.9m due beyond that. Offsetting these obligations, it had cash of NT$2.81b as well as receivables valued at NT$5.38b due within 12 months. So it can boast NT$1.09b more liquid assets than total liabilities.
This short term liquidity is a sign that FSP Technology could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, FSP Technology boasts net cash, so it's fair to say it does not have a heavy debt load!
Although FSP Technology made a loss at the EBIT level, last year, it was also good to see that it generated NT$404m in EBIT over the last twelve months. When analysing debt levels, the balance sheet is the obvious place to start. But it is FSP Technology's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.
Finally, a company can only pay off debt with cold hard cash, not accounting profits. FSP Technology 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. In the last year, FSP Technology's free cash flow amounted to 31% of its EBIT, less than we'd expect. That's not great, when it comes to paying down debt.
Summing up
While it is always sensible to investigate a company's debt, in this case FSP Technology has NT$2.55b in net cash and a decent-looking balance sheet. So we are not troubled with FSP Technology's debt use. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. Case in point: We've spotted 3 warning signs for FSP Technology you should be aware of, and 1 of them is significant.
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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About TWSE:3015
FSP Technology
Engages in manufacture, process, and trade of power supplies and electronic components in Taiwan, China, the United States, Germay, and internationally.
Flawless balance sheet second-rate dividend payer.
