Fositek (TWSE:6805) Seems To Use Debt Rather Sparingly

Warren Buffett famously said, '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 Fositek Corp. (TWSE:6805) makes use of debt. But should shareholders be worried about its use of debt?

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. 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. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for Fositek

What Is Fositek's Debt?

The image below, which you can click on for greater detail, shows that Fositek had debt of NT$340.0m at the end of September 2024, a reduction from NT$763.3m over a year. However, it does have NT$6.03b in cash offsetting this, leading to net cash of NT$5.69b.

How Healthy Is Fositek's Balance Sheet?

We can see from the most recent balance sheet that Fositek had liabilities of NT$4.03b falling due within a year, and liabilities of NT$678.6m due beyond that. On the other hand, it had cash of NT$6.03b and NT$1.23b worth of receivables due within a year. So it actually has NT$2.56b more liquid assets than total liabilities.

This short term liquidity is a sign that Fositek could probably pay off its debt with ease, as its balance sheet is far from stretched. Simply put, the fact that Fositek has more cash than debt is arguably a good indication that it can manage its debt safely.

On top of that, Fositek grew its EBIT by 37% 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 Fositek can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. Fositek 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. Happily for any shareholders, Fositek actually produced more free cash flow than EBIT over the last three years. That sort of strong cash conversion gets us as excited as the crowd when the beat drops at a Daft Punk concert.

Summing Up

While it is always sensible to investigate a company's debt, in this case Fositek has NT$5.69b in net cash and a decent-looking balance sheet. The cherry on top was that in converted 144% of that EBIT to free cash flow, bringing in NT$897m. So we don't think Fositek'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. We've identified 1 warning sign with Fositek , and understanding them should be part of your investment process.

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.