Formosa Chemicals & Fibre (TWSE:1326) Is Carrying A Fair Bit 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 can see that Formosa Chemicals & Fibre Corporation (TWSE:1326) does use debt in its business. But is this debt a concern to shareholders?

When Is Debt A Problem?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for Formosa Chemicals & Fibre

What Is Formosa Chemicals & Fibre's Net Debt?

The image below, which you can click on for greater detail, shows that at September 2024 Formosa Chemicals & Fibre had debt of NT$157.0b, up from NT$146.7b in one year. However, because it has a cash reserve of NT$89.1b, its net debt is less, at about NT$67.9b.

How Healthy Is Formosa Chemicals & Fibre's Balance Sheet?

The latest balance sheet data shows that Formosa Chemicals & Fibre had liabilities of NT$132.2b due within a year, and liabilities of NT$58.5b falling due after that. Offsetting these obligations, it had cash of NT$89.1b as well as receivables valued at NT$38.8b due within 12 months. So its liabilities total NT$62.7b more than the combination of its cash and short-term receivables.

Formosa Chemicals & Fibre has a market capitalization of NT$172.0b, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. However, it is still worthwhile taking a close look at its ability to pay off debt. 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 Formosa Chemicals & Fibre'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.

Over 12 months, Formosa Chemicals & Fibre reported revenue of NT$355b, which is a gain of 7.2%, although it did not report any earnings before interest and tax. We usually like to see faster growth from unprofitable companies, but each to their own.

Caveat Emptor

Over the last twelve months Formosa Chemicals & Fibre produced an earnings before interest and tax (EBIT) loss. To be specific the EBIT loss came in at NT$346m. 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. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. Surprisingly, we note that it actually reported positive free cash flow of NT$398m and a profit of NT$1.6b. So if we focus on those metrics there seems to be a chance the company will manage its debt without much trouble. 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. For example, we've discovered 1 warning sign for Formosa Chemicals & Fibre that you should be aware of before investing here.

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.