These 4 Measures Indicate That Asia Vital Components (TWSE:3017) Is Using Debt Safely

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.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. As with many other companies Asia Vital Components Co., Ltd. (TWSE:3017) makes use of debt. But the more important question is: how much risk is that debt creating?

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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. If things get really bad, the lenders can take control of the business. 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 think about a company's use of debt, we first look at cash and debt together.

What Is Asia Vital Components's Debt?

You can click the graphic below for the historical numbers, but it shows that as of December 2024 Asia Vital Components had NT$16.5b of debt, an increase on NT$13.0b, over one year. But on the other hand it also has NT$29.9b in cash, leading to a NT$13.4b net cash position.

How Healthy Is Asia Vital Components' Balance Sheet?

The latest balance sheet data shows that Asia Vital Components had liabilities of NT$58.3b due within a year, and liabilities of NT$8.14b falling due after that. On the other hand, it had cash of NT$29.9b and NT$8.31b worth of receivables due within a year. So its liabilities total NT$28.2b more than the combination of its cash and short-term receivables.

Given Asia Vital Components has a market capitalization of NT$195.3b, 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. Despite its noteworthy liabilities, Asia Vital Components boasts net cash, so it's fair to say it does not have a heavy debt load!

See our latest analysis for Asia Vital Components

On top of that, Asia Vital Components grew its EBIT by 46% over the last twelve months, and that growth will make it easier to handle its debt. 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 Asia Vital Components 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 business needs free cash flow to pay off debt; accounting profits just don't cut it. Asia Vital Components 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 most recent three years, Asia Vital Components recorded free cash flow worth 68% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This cold hard cash means it can reduce its debt when it wants to.

Summing Up

Although Asia Vital Components'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$13.4b. And we liked the look of last year's 46% year-on-year EBIT growth. So is Asia Vital Components's debt a risk? It doesn't seem so to us. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. For example, we've discovered 2 warning signs for Asia Vital Components that you should be aware of before investing here.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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.