These 4 Measures Indicate That FuSheng Precision (TWSE:6670) Is Using Debt Reasonably Well

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.' 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. We note that FuSheng Precision Co., Ltd. (TWSE:6670) does have debt on its balance sheet. But is this debt a concern to shareholders?

Why Does Debt Bring Risk?

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 common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first step when considering a company's debt levels is to consider its cash and debt together.

See 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$1.90b of debt in December 2023, down from NT$2.90b, one year before. But it also has NT$5.08b in cash to offset that, meaning it has NT$3.18b net cash.

How Healthy Is FuSheng Precision's Balance Sheet?

The latest balance sheet data shows that FuSheng Precision had liabilities of NT$5.97b due within a year, and liabilities of NT$1.60b falling due after that. Offsetting this, it had NT$5.08b in cash and NT$4.77b in receivables that were due within 12 months. So it actually has NT$2.28b 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. Succinctly put, FuSheng Precision boasts net cash, so it's fair to say it does not have a heavy debt load!

In fact FuSheng Precision's saving grace is its low debt levels, because its EBIT has tanked 47% in the last twelve months. Falling earnings (if the trend continues) could eventually make even modest debt quite risky. The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine FuSheng Precision's ability to maintain a healthy balance sheet going forward. 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. 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 69% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This free cash flow puts the company in a good position to pay down debt, when appropriate.

Summing Up

While it is always sensible to investigate a company's debt, in this case FuSheng Precision has NT$3.18b in net cash and a decent-looking balance sheet. The cherry on top was that in converted 69% of that EBIT to free cash flow, bringing in NT$4.0b. 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. These risks can be hard to spot. Every company has them, and we've spotted 2 warning signs for FuSheng Precision you should know about.

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.