Health Check: How Prudently Does FittechLtd (TWSE:6706) Use 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. Importantly, Fittech Co.,Ltd (TWSE:6706) does carry debt. But the real question is whether this debt is making the company risky.

What Risk Does Debt Bring?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. If things get really bad, the lenders can take control of the business. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for FittechLtd

What Is FittechLtd's Debt?

You can click the graphic below for the historical numbers, but it shows that as of March 2024 FittechLtd had NT$1.43b of debt, an increase on NT$987.5m, over one year. But on the other hand it also has NT$1.98b in cash, leading to a NT$545.4m net cash position.

A Look At FittechLtd's Liabilities

According to the last reported balance sheet, FittechLtd had liabilities of NT$1.38b due within 12 months, and liabilities of NT$1.08b due beyond 12 months. Offsetting this, it had NT$1.98b in cash and NT$486.7m in receivables that were due within 12 months. So its total liabilities are just about perfectly matched by its shorter-term, liquid assets.

Having regard to FittechLtd's size, it seems that its liquid assets are well balanced with its total liabilities. So it's very unlikely that the NT$9.45b company is short on cash, but still worth keeping an eye on the balance sheet. Succinctly put, FittechLtd boasts net cash, so it's fair to say it does not have a heavy debt load! There's no doubt that we learn most about debt from the balance sheet. But it is FittechLtd's earnings that will influence how the balance sheet holds up in the future. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

In the last year FittechLtd had a loss before interest and tax, and actually shrunk its revenue by 63%, to NT$1.1b. To be frank that doesn't bode well.

So How Risky Is FittechLtd?

By their very nature companies that are losing money are more risky than those with a long history of profitability. And the fact is that over the last twelve months FittechLtd lost money at the earnings before interest and tax (EBIT) line. Indeed, in that time it burnt through NT$596m of cash and made a loss of NT$392m. With only NT$545.4m on the balance sheet, it would appear that its going to need to raise capital again soon. Overall, its balance sheet doesn't seem overly risky, at the moment, but we're always cautious until we see the positive free cash flow. 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 instance, we've identified 2 warning signs for FittechLtd (1 doesn't sit too well with us) you should be aware of.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com