Favite (TWSE:3535) Has A Rock Solid Balance Sheet

Warren Buffett famously said, '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. As with many other companies Favite, Inc. (TWSE:3535) makes use of debt. But is this debt a concern to shareholders?

When Is Debt A Problem?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. 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 Favite

How Much Debt Does Favite Carry?

As you can see below, Favite had NT$235.6m of debt at June 2024, down from NT$274.3m a year prior. However, it does have NT$684.0m in cash offsetting this, leading to net cash of NT$448.4m.

A Look At Favite's Liabilities

Zooming in on the latest balance sheet data, we can see that Favite had liabilities of NT$317.4m due within 12 months and liabilities of NT$206.3m due beyond that. Offsetting this, it had NT$684.0m in cash and NT$417.1m in receivables that were due within 12 months. So it can boast NT$577.3m more liquid assets than total liabilities.

This surplus suggests that Favite has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Simply put, the fact that Favite has more cash than debt is arguably a good indication that it can manage its debt safely.

Even more impressive was the fact that Favite grew its EBIT by 102% over twelve months. That boost will make it even easier to pay down debt going forward. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Favite's earnings that will influence how the balance sheet holds up in the future. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. Favite 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, Favite generated free cash flow amounting to a very robust 91% of its EBIT, more than we'd expect. That puts it in a very strong position to pay down debt.

Summing Up

While it is always sensible to investigate a company's debt, in this case Favite has NT$448.4m in net cash and a decent-looking balance sheet. And it impressed us with free cash flow of NT$223m, being 91% of its EBIT. So we don't think Favite's use of debt is risky. 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. These risks can be hard to spot. Every company has them, and we've spotted 2 warning signs for Favite (of which 1 doesn't sit too well with us!) you should know about.

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.