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

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' 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. We can see that Formosa Plastics Corporation (TWSE:1301) does use debt in its business. 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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

Check out our latest analysis for Formosa Plastics

What Is Formosa Plastics's Debt?

You can click the graphic below for the historical numbers, but it shows that as of June 2024 Formosa Plastics had NT$149.3b of debt, an increase on NT$97.7b, over one year. On the flip side, it has NT$80.9b in cash leading to net debt of about NT$68.3b.

How Healthy Is Formosa Plastics' Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Formosa Plastics had liabilities of NT$116.1b due within 12 months and liabilities of NT$92.1b due beyond that. On the other hand, it had cash of NT$80.9b and NT$46.3b worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by NT$80.9b.

This deficit isn't so bad because Formosa Plastics is worth NT$303.6b, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. However, it is still worthwhile taking a close look at its ability to pay off debt. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Formosa Plastics'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.

In the last year Formosa Plastics had a loss before interest and tax, and actually shrunk its revenue by 4.7%, to NT$198b. We would much prefer see growth.

Caveat Emptor

Importantly, Formosa Plastics had an earnings before interest and tax (EBIT) loss over the last year. To be specific the EBIT loss came in at NT$2.8b. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. So we think its balance sheet is a little strained, though not beyond repair. However, it doesn't help that it burned through NT$14b of cash over the last year. So suffice it to say we do consider the stock to be risky. There's no doubt that we learn most about debt from the balance sheet. 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, 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.