Asia Vital Components (TWSE:3017) 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 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. We can see that Asia Vital Components Co., Ltd. (TWSE:3017) does use debt in its business. But the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. 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 Asia Vital Components

What Is Asia Vital Components's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of September 2024 Asia Vital Components had NT$14.6b of debt, an increase on NT$13.0b, over one year. But on the other hand it also has NT$30.0b in cash, leading to a NT$15.4b net cash position.

A Look At Asia Vital Components' Liabilities

The latest balance sheet data shows that Asia Vital Components had liabilities of NT$49.9b due within a year, and liabilities of NT$7.28b falling due after that. Offsetting this, it had NT$30.0b in cash and NT$6.98b in receivables that were due within 12 months. So its liabilities total NT$20.2b more than the combination of its cash and short-term receivables.

Of course, Asia Vital Components has a market capitalization of NT$243.8b, 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, Asia Vital Components 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 Asia Vital Components has boosted its EBIT by 48%, thus reducing the spectre of future debt repayments. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Asia Vital Components'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, while the tax-man may adore accounting profits, lenders only accept 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. During the last three years, Asia Vital Components produced sturdy free cash flow equating to 75% of its EBIT, about what we'd expect. This free cash flow puts the company in a good position to pay down debt, when appropriate.

Summing Up

While it is always sensible to look at a company's total liabilities, it is very reassuring that Asia Vital Components has NT$15.4b in net cash. And it impressed us with its EBIT growth of 48% over the last year. So we don't think Asia Vital Components's use of debt is risky. Over time, share prices tend to follow earnings per share, so if you're interested in Asia Vital Components, you may well want to click here to check an interactive graph of its earnings per share history.

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.

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

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.