Is FuSheng Precision (TWSE:6670) Using Too Much Debt?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. As with many other companies FuSheng Precision Co., Ltd. (TWSE:6670) makes use of debt. But is this debt a concern to shareholders?

When Is Debt Dangerous?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. If things get really bad, the lenders can take control of the business. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

View our latest analysis for FuSheng Precision

What Is FuSheng Precision's Debt?

You can click the graphic below for the historical numbers, but it shows that FuSheng Precision had NT$1.79b of debt in March 2024, down from NT$2.37b, one year before. However, it does have NT$6.61b in cash offsetting this, leading to net cash of NT$4.82b.

A Look At FuSheng Precision's Liabilities

The latest balance sheet data shows that FuSheng Precision had liabilities of NT$4.89b due within a year, and liabilities of NT$1.85b falling due after that. Offsetting these obligations, it had cash of NT$6.61b as well as receivables valued at NT$4.03b due within 12 months. So it actually has NT$3.91b more liquid assets than total liabilities.

This surplus suggests that FuSheng Precision has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Simply put, the fact that FuSheng Precision has more cash than debt is arguably a good indication that it can manage its debt safely.

In fact FuSheng Precision's saving grace is its low debt levels, because its EBIT has tanked 44% in the last twelve months. When a company sees its earnings tank, it can sometimes find its relationships with its lenders turn sour. 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 FuSheng Precision 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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. FuSheng Precision 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 most recent three years, FuSheng Precision recorded free cash flow worth 74% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This cold hard cash means it can reduce its debt when it wants to.

Summing Up

While it is always sensible to investigate a company's debt, in this case FuSheng Precision has NT$4.82b in net cash and a decent-looking balance sheet. And it impressed us with free cash flow of NT$3.9b, being 74% of its EBIT. So we don't have any problem with FuSheng Precision's use of debt. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. To that end, you should be aware of the 1 warning sign we've spotted with FuSheng Precision .

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. 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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com