Does Feng Hsin SteelLtd (TPE:2015) Have A Healthy Balance Sheet?

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, Feng Hsin Steel Co.,Ltd (TPE:2015) does carry debt. But should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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 Feng Hsin SteelLtd

How Much Debt Does Feng Hsin SteelLtd Carry?

You can click the graphic below for the historical numbers, but it shows that Feng Hsin SteelLtd had NT$329.9m of debt in December 2020, down from NT$381.2m, one year before. But it also has NT$3.88b in cash to offset that, meaning it has NT$3.55b net cash.

A Look At Feng Hsin SteelLtd's Liabilities

We can see from the most recent balance sheet that Feng Hsin SteelLtd had liabilities of NT$3.22b falling due within a year, and liabilities of NT$330.5m due beyond that. Offsetting these obligations, it had cash of NT$3.88b as well as receivables valued at NT$1.90b due within 12 months. So it actually has NT$2.23b more liquid assets than total liabilities.

This surplus suggests that Feng Hsin SteelLtd has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, Feng Hsin SteelLtd boasts net cash, so it's fair to say it does not have a heavy debt load!

In addition to that, we're happy to report that Feng Hsin SteelLtd has boosted its EBIT by 48%, thus reducing the spectre of future debt repayments. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Feng Hsin SteelLtd'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.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. Feng Hsin SteelLtd 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, Feng Hsin SteelLtd recorded free cash flow worth 76% 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 Feng Hsin SteelLtd has NT$3.55b in net cash and a decent-looking balance sheet. And we liked the look of last year's 48% year-on-year EBIT growth. So we don't think Feng Hsin SteelLtd's use of debt is risky. 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. For example, we've discovered 1 warning sign for Feng Hsin SteelLtd that you should be aware of before investing here.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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