We Think Formosa Plastics (TWSE:1301) Has A Fair Chunk Of Debt

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. We note that Formosa Plastics Corporation (TWSE:1301) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for Formosa Plastics

How Much Debt Does Formosa Plastics Carry?

As you can see below, at the end of March 2024, Formosa Plastics had NT$136.0b of debt, up from NT$94.3b a year ago. Click the image for more detail. However, it does have NT$86.5b in cash offsetting this, leading to net debt of about NT$49.5b.

How Strong Is Formosa Plastics' Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Formosa Plastics had liabilities of NT$96.1b due within 12 months and liabilities of NT$97.8b due beyond that. On the other hand, it had cash of NT$86.5b and NT$41.1b worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by NT$66.4b.

Given Formosa Plastics has a humongous market capitalization of NT$368.6b, it's hard to believe these liabilities pose much threat. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Formosa Plastics can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Over 12 months, Formosa Plastics made a loss at the EBIT level, and saw its revenue drop to NT$195b, which is a fall of 16%. We would much prefer see growth.

Caveat Emptor

Not only did Formosa Plastics's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). To be specific the EBIT loss came in at NT$5.5b. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. However, it doesn't help that it burned through NT$8.7b of cash over the last year. So suffice it to say we do consider the stock to be 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. Be aware that Formosa Plastics is showing 1 warning sign in our investment analysis , you should know about...

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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.

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