ASUSTeK Computer (TPE:2357) Could Easily Take On More Debt

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. As with many other companies ASUSTeK Computer Inc. (TPE:2357) makes use of debt. But the real question is whether this debt is making the company risky.

What Risk Does Debt Bring?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. 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 ASUSTeK Computer

What Is ASUSTeK Computer's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of September 2020 ASUSTeK Computer had NT$6.11b of debt, an increase on NT$5.60b, over one year. But it also has NT$81.9b in cash to offset that, meaning it has NT$75.8b net cash.

A Look At ASUSTeK Computer's Liabilities

We can see from the most recent balance sheet that ASUSTeK Computer had liabilities of NT$179.4b falling due within a year, and liabilities of NT$14.1b due beyond that. On the other hand, it had cash of NT$81.9b and NT$85.2b worth of receivables due within a year. So it has liabilities totalling NT$26.4b more than its cash and near-term receivables, combined.

Since publicly traded ASUSTeK Computer shares are worth a total of NT$232.5b, it seems unlikely that this level of liabilities would be a major threat. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. Despite its noteworthy liabilities, ASUSTeK Computer boasts net cash, so it's fair to say it does not have a heavy debt load!

On top of that, ASUSTeK Computer grew its EBIT by 63% over the last twelve months, and that growth will make it easier to handle its debt. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine ASUSTeK Computer's ability to maintain a healthy balance sheet going forward. 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. ASUSTeK Computer 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, ASUSTeK Computer recorded free cash flow worth 68% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This cold hard cash means it can reduce its debt when it wants to.

Summing up

Although ASUSTeK Computer's balance sheet isn't particularly strong, due to the total liabilities, it is clearly positive to see that it has net cash of NT$75.8b. And we liked the look of last year's 63% year-on-year EBIT growth. So we don't think ASUSTeK Computer's use of debt is risky. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. To that end, you should be aware of the 1 warning sign we've spotted with ASUSTeK Computer .

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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