Here's Why Taiwan Fu Hsing IndustrialLtd (TPE:9924) Can Manage Its Debt Responsibly

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. We can see that Taiwan Fu Hsing Industrial Co.,Ltd. (TPE:9924) does use debt in its business. But should shareholders be worried about its use of debt?

When Is Debt Dangerous?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. 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. 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 Taiwan Fu Hsing IndustrialLtd

What Is Taiwan Fu Hsing IndustrialLtd's Net Debt?

You can click the graphic below for the historical numbers, but it shows that Taiwan Fu Hsing IndustrialLtd had NT$497.2m of debt in September 2020, down from NT$624.7m, one year before. But it also has NT$2.05b in cash to offset that, meaning it has NT$1.55b net cash.

How Healthy Is Taiwan Fu Hsing IndustrialLtd's Balance Sheet?

According to the last reported balance sheet, Taiwan Fu Hsing IndustrialLtd had liabilities of NT$2.02b due within 12 months, and liabilities of NT$793.7m due beyond 12 months. Offsetting these obligations, it had cash of NT$2.05b as well as receivables valued at NT$2.10b due within 12 months. So it actually has NT$1.34b more liquid assets than total liabilities.

It's good to see that Taiwan Fu Hsing IndustrialLtd has plenty of liquidity on its balance sheet, suggesting conservative management of liabilities. Given it has easily adequate short term liquidity, we don't think it will have any issues with its lenders. Succinctly put, Taiwan Fu Hsing IndustrialLtd boasts net cash, so it's fair to say it does not have a heavy debt load!

While Taiwan Fu Hsing IndustrialLtd doesn't seem to have gained much on the EBIT line, at least earnings remain stable for now. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Taiwan Fu Hsing IndustrialLtd's earnings that will influence how the balance sheet holds up in the future. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. Taiwan Fu Hsing IndustrialLtd 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. Looking at the most recent three years, Taiwan Fu Hsing IndustrialLtd recorded free cash flow of 30% of its EBIT, which is weaker than we'd expect. That weak cash conversion makes it more difficult to handle indebtedness.

Summing up

While we empathize with investors who find debt concerning, you should keep in mind that Taiwan Fu Hsing IndustrialLtd has net cash of NT$1.55b, as well as more liquid assets than liabilities. So we are not troubled with Taiwan Fu Hsing IndustrialLtd'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. For example, we've discovered 1 warning sign for Taiwan Fu Hsing IndustrialLtd that you should be aware of before investing here.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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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