We Think Feng Hsin Steel (TWSE:2015) Can Stay On Top Of Its Debt

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. We can see that Feng Hsin Steel Co., Ltd. (TWSE:2015) does use debt in its business. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

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. 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. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

See our latest analysis for Feng Hsin Steel

What Is Feng Hsin Steel's Net Debt?

The image below, which you can click on for greater detail, shows that Feng Hsin Steel had debt of NT$987.6m at the end of December 2024, a reduction from NT$1.95b over a year. However, it does have NT$1.75b in cash offsetting this, leading to net cash of NT$759.8m.

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How Healthy Is Feng Hsin Steel's Balance Sheet?

The latest balance sheet data shows that Feng Hsin Steel had liabilities of NT$3.67b due within a year, and liabilities of NT$754.2m falling due after that. Offsetting this, it had NT$1.75b in cash and NT$2.44b in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by NT$241.7m.

This state of affairs indicates that Feng Hsin Steel's balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So while it's hard to imagine that the NT$44.4b company is struggling for cash, we still think it's worth monitoring its balance sheet. While it does have liabilities worth noting, Feng Hsin Steel also has more cash than debt, so we're pretty confident it can manage its debt safely.

Fortunately, Feng Hsin Steel grew its EBIT by 2.3% in the last year, making that debt load look even more manageable. 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 Feng Hsin Steel'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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. While Feng Hsin Steel has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. During the last three years, Feng Hsin Steel produced sturdy free cash flow equating to 65% of its EBIT, about what we'd expect. This cold hard cash means it can reduce its debt when it wants to.

Summing Up

We could understand if investors are concerned about Feng Hsin Steel's liabilities, but we can be reassured by the fact it has has net cash of NT$759.8m. So we don't think Feng Hsin Steel's use of debt is risky. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. We've identified 1 warning sign with Feng Hsin Steel , and understanding them should be part of your investment process.

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.