Does Fortune Electric (TWSE:1519) Have A Healthy Balance Sheet?

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. As with many other companies Fortune Electric Co., Ltd. (TWSE:1519) makes use of debt. But is this debt a concern to shareholders?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for Fortune Electric

How Much Debt Does Fortune Electric Carry?

As you can see below, Fortune Electric had NT$1.19b of debt at June 2024, down from NT$2.12b a year prior. However, it does have NT$3.67b in cash offsetting this, leading to net cash of NT$2.47b.

A Look At Fortune Electric's Liabilities

Zooming in on the latest balance sheet data, we can see that Fortune Electric had liabilities of NT$12.4b due within 12 months and liabilities of NT$711.2m due beyond that. Offsetting these obligations, it had cash of NT$3.67b as well as receivables valued at NT$4.58b due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by NT$4.82b.

Since publicly traded Fortune Electric shares are worth a total of NT$181.2b, it seems unlikely that this level of liabilities would be a major threat. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. Despite its noteworthy liabilities, Fortune Electric boasts net cash, so it's fair to say it does not have a heavy debt load!

Even more impressive was the fact that Fortune Electric grew its EBIT by 271% over twelve months. If maintained that growth will make the debt even more manageable in the years ahead. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if Fortune Electric can strengthen its balance sheet over time. 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 company can only pay off debt with cold hard cash, not accounting profits. Fortune Electric 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. Over the last three years, Fortune Electric actually produced more free cash flow than EBIT. There's nothing better than incoming cash when it comes to staying in your lenders' good graces.

Summing Up

We could understand if investors are concerned about Fortune Electric's liabilities, but we can be reassured by the fact it has has net cash of NT$2.47b. The cherry on top was that in converted 100% of that EBIT to free cash flow, bringing in NT$4.5b. So is Fortune Electric's debt a risk? It doesn't seem so to us. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. For instance, we've identified 1 warning sign for Fortune Electric that you should be aware of.

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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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.