We Think Asia Vital Components (TWSE:3017) Can Manage Its Debt With Ease

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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 is this debt a concern to shareholders?

When Is Debt Dangerous?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

Check out our latest analysis for Asia Vital Components

What Is Asia Vital Components's Net Debt?

The image below, which you can click on for greater detail, shows that Asia Vital Components had debt of NT$11.9b at the end of March 2024, a reduction from NT$14.7b over a year. However, its balance sheet shows it holds NT$31.0b in cash, so it actually has NT$19.1b net cash.

How Strong Is Asia Vital Components' Balance Sheet?

We can see from the most recent balance sheet that Asia Vital Components had liabilities of NT$40.7b falling due within a year, and liabilities of NT$8.83b due beyond that. Offsetting this, it had NT$31.0b in cash and NT$6.11b in receivables that were due within 12 months. So it has liabilities totalling NT$12.4b more than its cash and near-term receivables, combined.

Given Asia Vital Components has a market capitalization of NT$244.6b, 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!

Also positive, Asia Vital Components grew its EBIT by 27% in the last year, and that should make it easier to pay down debt, going forward. 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 want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. 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. During the last three years, Asia Vital Components produced sturdy free cash flow equating to 79% 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$19.1b in net cash. And it impressed us with free cash flow of NT$9.4b, being 79% of its EBIT. 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. But ultimately, every company can contain risks that exist outside of the balance sheet. To that end, you should be aware of the 1 warning sign we've spotted with Asia Vital Components .

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.