Does Asia Vital Components (TPE:3017) Have A Healthy Balance Sheet?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. We can see that Asia Vital Components Co., Ltd. (TPE:3017) does use debt in its business. But the real question is whether this debt is making the company risky.

When Is Debt A Problem?

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. 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. 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.

Check out our latest analysis for Asia Vital Components

What Is Asia Vital Components's Net Debt?

The image below, which you can click on for greater detail, shows that at December 2020 Asia Vital Components had debt of NT$8.64b, up from NT$8.01b in one year. But it also has NT$11.1b in cash to offset that, meaning it has NT$2.47b net cash.

How Healthy Is Asia Vital Components' Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Asia Vital Components had liabilities of NT$21.5b due within 12 months and liabilities of NT$7.92b due beyond that. Offsetting these obligations, it had cash of NT$11.1b as well as receivables valued at NT$4.72b due within 12 months. So it has liabilities totalling NT$13.6b more than its cash and near-term receivables, combined.

This deficit isn't so bad because Asia Vital Components is worth NT$24.3b, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. Despite its noteworthy liabilities, Asia Vital Components boasts net cash, so it's fair to say it does not have a heavy debt load!

Even more impressive was the fact that Asia Vital Components grew its EBIT by 159% over twelve months. That boost will make it even easier to pay down debt going forward. 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 Asia Vital Components 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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. While Asia Vital Components 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. In the last three years, Asia Vital Components's free cash flow amounted to 47% of its EBIT, less than we'd expect. That's not great, when it comes to paying down debt.

Summing up

Although Asia Vital Components'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$2.47b. And it impressed us with its EBIT growth of 159% over the last year. So we are not troubled with Asia Vital Components's debt use. 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 example, we've discovered 2 warning signs for Asia Vital Components that you should be aware of before investing here.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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