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

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.' 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. As with many other companies Foxsemicon Integrated Technology Inc. (TWSE:3413) makes use of debt. But is this debt a concern to shareholders?

When Is Debt Dangerous?

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. If things get really bad, the lenders can take control of the business. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for Foxsemicon Integrated Technology

How Much Debt Does Foxsemicon Integrated Technology Carry?

The image below, which you can click on for greater detail, shows that Foxsemicon Integrated Technology had debt of NT$2.66b at the end of June 2024, a reduction from NT$3.86b over a year. But it also has NT$11.2b in cash to offset that, meaning it has NT$8.51b 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$5.23b due within 12 months, and liabilities of NT$3.08b due beyond 12 months. Offsetting this, it had NT$11.2b in cash and NT$1.61b in receivables that were due within 12 months. So it can boast NT$4.46b 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.

In fact Foxsemicon Integrated Technology's saving grace is its low debt levels, because its EBIT has tanked 26% in the last twelve months. Falling earnings (if the trend continues) could eventually make even modest debt quite risky. 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 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. Looking at the most recent three years, Foxsemicon Integrated Technology recorded free cash flow of 43% of its EBIT, which is weaker than we'd expect. That weak cash conversion makes it more difficult to handle indebtedness.

Summing Up

While it is always sensible to investigate a company's debt, in this case Foxsemicon Integrated Technology has NT$8.51b in net cash and a decent-looking balance sheet. 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. But ultimately, every company can contain risks that exist outside of the balance sheet. Case in point: We've spotted 3 warning signs for Foxsemicon Integrated Technology you should be aware of.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.