Foxsemicon Integrated Technology (TPE:3413) Could Easily Take On More Debt

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. We note that Foxsemicon Integrated Technology Inc. (TPE:3413) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

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. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for Foxsemicon Integrated Technology

What Is Foxsemicon Integrated Technology's Debt?

You can click the graphic below for the historical numbers, but it shows that Foxsemicon Integrated Technology had NT$1.06b of debt in September 2020, down from NT$1.18b, one year before. However, its balance sheet shows it holds NT$3.45b in cash, so it actually has NT$2.39b net cash.

A Look At Foxsemicon Integrated Technology's Liabilities

Zooming in on the latest balance sheet data, we can see that Foxsemicon Integrated Technology had liabilities of NT$3.50b due within 12 months and liabilities of NT$183.9m due beyond that. Offsetting these obligations, it had cash of NT$3.45b as well as receivables valued at NT$1.11b due within 12 months. So it actually has NT$884.0m more liquid assets than total liabilities.

This surplus suggests that Foxsemicon Integrated Technology has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Simply put, the fact that Foxsemicon Integrated Technology has more cash than debt is arguably a good indication that it can manage its debt safely.

Better yet, Foxsemicon Integrated Technology grew its EBIT by 132% last year, which is an impressive improvement. If maintained that growth will make the debt even more manageable in the years ahead. 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 Foxsemicon Integrated Technology'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. Foxsemicon Integrated Technology 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, Foxsemicon Integrated Technology recorded free cash flow worth 77% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This free cash flow puts the company in a good position to pay down debt, when appropriate.

Summing up

While it is always sensible to investigate a company's debt, in this case Foxsemicon Integrated Technology has NT$2.39b in net cash and a decent-looking balance sheet. And it impressed us with its EBIT growth of 132% over the last year. So we don't think Foxsemicon Integrated Technology's use of debt is risky. Above most other metrics, we think its important to track how fast earnings per share is growing, if at all. If you've also come to that realization, you're in luck, because today you can view this interactive graph of Foxsemicon Integrated Technology's earnings per share history for free.

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. 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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