ASUSTeK Computer (TWSE: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.' 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. We note that ASUSTeK Computer Inc. (TWSE:2357) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

When Is Debt A Problem?

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 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. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for ASUSTeK Computer

What Is ASUSTeK Computer's Debt?

As you can see below, at the end of September 2024, ASUSTeK Computer had NT$25.8b of debt, up from NT$20.7b a year ago. Click the image for more detail. However, it does have NT$85.6b in cash offsetting this, leading to net cash of NT$59.8b.

How Healthy Is ASUSTeK Computer's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that ASUSTeK Computer had liabilities of NT$232.8b due within 12 months and liabilities of NT$24.3b due beyond that. On the other hand, it had cash of NT$85.6b and NT$120.4b worth of receivables due within a year. So it has liabilities totalling NT$51.1b more than its cash and near-term receivables, combined.

Given ASUSTeK Computer has a humongous market capitalization of NT$441.9b, it's hard to believe these liabilities pose much threat. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. While it does have liabilities worth noting, ASUSTeK Computer also has more cash than debt, so we're pretty confident it can manage its debt safely.

Better yet, ASUSTeK Computer grew its EBIT by 835% last year, which is an impressive improvement. If maintained that growth will make the debt even more manageable in the years ahead. 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. 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 last three years, ASUSTeK Computer recorded free cash flow worth a fulsome 84% of its EBIT, which is stronger than we'd usually expect. That puts it in a very strong position to pay down debt.

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$59.8b. The cherry on top was that in converted 84% of that EBIT to free cash flow, bringing in NT$8.5b. So we don't think ASUSTeK Computer's use of debt is risky. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. For example, we've discovered 1 warning sign for ASUSTeK Computer that you should be aware of before investing here.

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.