Foxsemicon Integrated Technology (TWSE:3413) Seems To Use Debt Quite Sensibly

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. As with many other companies Foxsemicon Integrated Technology Inc. (TWSE:3413) makes use of debt. But should shareholders be worried about its use of debt?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Of course, plenty of companies use debt to fund growth, without any negative consequences. 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 Foxsemicon Integrated Technology

What Is Foxsemicon Integrated Technology's Net Debt?

You can click the graphic below for the historical numbers, but it shows that Foxsemicon Integrated Technology had NT$3.54b of debt in December 2023, down from NT$3.80b, one year before. But it also has NT$10.6b in cash to offset that, meaning it has NT$7.05b net cash.

How Healthy Is Foxsemicon Integrated Technology's Balance Sheet?

According to the last reported balance sheet, Foxsemicon Integrated Technology had liabilities of NT$3.54b due within 12 months, and liabilities of NT$4.23b due beyond 12 months. On the other hand, it had cash of NT$10.6b and NT$904.5m worth of receivables due within a year. So it actually has NT$3.72b 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.

The modesty of its debt load may become crucial for Foxsemicon Integrated Technology if management cannot prevent a repeat of the 31% cut to EBIT over the last year. When a company sees its earnings tank, it can sometimes find its relationships with its lenders turn sour. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if Foxsemicon Integrated Technology 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.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. 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. In the last three years, Foxsemicon Integrated Technology's free cash flow amounted to 42% of its EBIT, less than we'd expect. That's not great, when it comes to paying down debt.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Foxsemicon Integrated Technology has net cash of NT$7.05b, as well as more liquid assets than liabilities. So we don't have any problem with Foxsemicon Integrated Technology's use of debt. 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. To that end, you should be aware of the 1 warning sign we've spotted with Foxsemicon Integrated Technology .

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.