Is ASUSTeK Computer (TWSE:2357) Using Too Much Debt?

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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. Importantly, ASUSTeK Computer Inc. (TWSE:2357) does carry debt. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. 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. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for ASUSTeK Computer

How Much Debt Does ASUSTeK Computer Carry?

You can click the graphic below for the historical numbers, but it shows that ASUSTeK Computer had NT$18.9b of debt in March 2024, down from NT$35.2b, one year before. However, its balance sheet shows it holds NT$75.8b in cash, so it actually has NT$56.9b net cash.

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$197.1b due within 12 months and liabilities of NT$24.8b due beyond that. Offsetting these obligations, it had cash of NT$75.8b as well as receivables valued at NT$88.4b due within 12 months. So it has liabilities totalling NT$57.8b more than its cash and near-term receivables, combined.

Of course, ASUSTeK Computer has a titanic market capitalization of NT$340.2b, 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. 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.

It was also good to see that despite losing money on the EBIT line last year, ASUSTeK Computer turned things around in the last 12 months, delivering and EBIT of NT$19b. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if ASUSTeK Computer 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.

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. Over the last year, ASUSTeK Computer actually produced more free cash flow than EBIT. That sort of strong cash generation warms our hearts like a puppy in a bumblebee suit.

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$56.9b. The cherry on top was that in converted 121% of that EBIT to free cash flow, bringing in NT$23b. So is ASUSTeK Computer's debt a risk? It doesn't seem so to us. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. We've identified 1 warning sign with ASUSTeK Computer , and understanding them should be part of your investment process.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com