Is Formosa Petrochemical (TWSE:6505) Weighed On By Its Debt Load?

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' 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, Formosa Petrochemical Corporation (TWSE:6505) does carry 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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. 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.

What Is Formosa Petrochemical's Debt?

You can click the graphic below for the historical numbers, but it shows that as of December 2024 Formosa Petrochemical had NT$32.8b of debt, an increase on NT$28.4b, over one year. However, its balance sheet shows it holds NT$51.2b in cash, so it actually has NT$18.4b net cash.

How Strong Is Formosa Petrochemical's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Formosa Petrochemical had liabilities of NT$45.9b due within 12 months and liabilities of NT$23.0b due beyond that. On the other hand, it had cash of NT$51.2b and NT$55.7b worth of receivables due within a year. So it actually has NT$38.0b more liquid assets than total liabilities.

This surplus suggests that Formosa Petrochemical has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Simply put, the fact that Formosa Petrochemical has more cash than debt is arguably a good indication that it can manage its debt safely. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine Formosa Petrochemical's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

View our latest analysis for Formosa Petrochemical

In the last year Formosa Petrochemical had a loss before interest and tax, and actually shrunk its revenue by 6.8%, to NT$664b. That's not what we would hope to see.

So How Risky Is Formosa Petrochemical?

Although Formosa Petrochemical had an earnings before interest and tax (EBIT) loss over the last twelve months, it made a statutory profit of NT$6.0b. So taking that on face value, and considering the cash, we don't think its very risky in the near term. We'll feel more comfortable with the stock once EBIT is positive, given the lacklustre revenue growth. 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. These risks can be hard to spot. Every company has them, and we've spotted 2 warning signs for Formosa Petrochemical (of which 1 can't be ignored!) 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.