ASUSTeK Computer (TPE:2357) Seems To Use Debt Rather Sparingly

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. We note that ASUSTeK Computer Inc. (TPE:2357) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

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 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. 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.

View 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 on the other hand it also has NT$81.9b in cash, leading to a NT$75.8b net cash position.

How Healthy Is ASUSTeK Computer's Balance Sheet?

The latest balance sheet data shows that ASUSTeK Computer had liabilities of NT$179.4b due within a year, and liabilities of NT$14.1b falling due after that. Offsetting these obligations, it had cash of NT$81.9b as well as receivables valued at NT$85.2b due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by NT$26.4b.

Of course, ASUSTeK Computer has a market capitalization of NT$188.7b, so these liabilities are probably manageable. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. 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. 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 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 company can only pay off debt with cold hard cash, not accounting profits. While ASUSTeK Computer has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. During the last three years, ASUSTeK Computer produced sturdy free cash flow equating to 68% of its EBIT, about what we'd expect. This cold hard cash means it can reduce its debt when it wants to.

Summing up

While ASUSTeK Computer does have more liabilities than liquid assets, it also has net cash of NT$75.8b. And it impressed us with its EBIT growth of 63% over the last year. 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. However, not all investment risk resides within the balance sheet - far from it. Consider risks, for instance. Every company has them, and we've spotted 1 warning sign for ASUSTeK Computer you should know about.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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