These 4 Measures Indicate That Quanta Computer (TWSE:2382) Is Using Debt Safely

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.' 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. Importantly, Quanta Computer Inc. (TWSE:2382) does carry debt. But is this debt a concern to shareholders?

Why Does Debt Bring Risk?

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. 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.

See our latest analysis for Quanta Computer

What Is Quanta Computer's Net Debt?

As you can see below, Quanta Computer had NT$140.5b of debt at June 2024, down from NT$165.7b a year prior. But it also has NT$157.7b in cash to offset that, meaning it has NT$17.2b net cash.

How Strong Is Quanta Computer's Balance Sheet?

According to the last reported balance sheet, Quanta Computer had liabilities of NT$539.5b due within 12 months, and liabilities of NT$15.7b due beyond 12 months. Offsetting these obligations, it had cash of NT$157.7b as well as receivables valued at NT$279.2b due within 12 months. So its liabilities total NT$118.3b more than the combination of its cash and short-term receivables.

Of course, Quanta Computer has a titanic market capitalization of NT$1.05t, so these liabilities are probably manageable. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. While it does have liabilities worth noting, Quanta Computer also has more cash than debt, so we're pretty confident it can manage its debt safely.

In addition to that, we're happy to report that Quanta Computer has boosted its EBIT by 30%, thus reducing the spectre of future debt repayments. 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 Quanta 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 Quanta 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. Happily for any shareholders, Quanta Computer actually produced more free cash flow than EBIT over the last three years. That sort of strong cash generation warms our hearts like a puppy in a bumblebee suit.

Summing Up

Although Quanta 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$17.2b. The cherry on top was that in converted 119% of that EBIT to free cash flow, bringing in NT$44b. So is Quanta Computer's debt a risk? It doesn't seem so to us. Another positive for shareholders is that it pays dividends. So if you like receiving those dividend payments, check Quanta Computer's dividend history, without delay!

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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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.