FIT Holding (TPE:3712) Is Carrying A Fair Bit Of Debt

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. Importantly, FIT Holding Co., Ltd. (TPE:3712) does carry debt. But should shareholders be worried about its use of debt?

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. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for FIT Holding

How Much Debt Does FIT Holding Carry?

You can click the graphic below for the historical numbers, but it shows that as of June 2020 FIT Holding had NT$7.09b of debt, an increase on NT$5.86b, over one year. However, it also had NT$2.18b in cash, and so its net debt is NT$4.91b.

How Healthy Is FIT Holding's Balance Sheet?

According to the last reported balance sheet, FIT Holding had liabilities of NT$6.12b due within 12 months, and liabilities of NT$3.64b due beyond 12 months. Offsetting this, it had NT$2.18b in cash and NT$936.0m in receivables that were due within 12 months. So its liabilities total NT$6.64b more than the combination of its cash and short-term receivables.

This deficit is considerable relative to its market capitalization of NT$9.97b, so it does suggest shareholders should keep an eye on FIT Holding's use of debt. Should its lenders demand that it shore up the balance sheet, shareholders would likely face severe dilution. There's no doubt that we learn most about debt from the balance sheet. But it is FIT Holding's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

In the last year FIT Holding wasn't profitable at an EBIT level, but managed to grow its revenue by 23%, to NT$8.0b. Shareholders probably have their fingers crossed that it can grow its way to profits.

Caveat Emptor

While we can certainly appreciate FIT Holding's revenue growth, its earnings before interest and tax (EBIT) loss is not ideal. Indeed, it lost NT$415m at the EBIT level. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. However, it doesn't help that it burned through NT$925m of cash over the last year. So in short it's a really risky stock. 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 learn about the 3 warning signs we've spotted with FIT Holding (including 2 which is are potentially serious) .

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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