Does ASUSTeK Computer (TWSE:2357) Have A Healthy Balance Sheet?

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. We can see that ASUSTeK Computer Inc. (TWSE:2357) 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 and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. 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. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for ASUSTeK Computer

How Much Debt Does ASUSTeK Computer Carry?

The image below, which you can click on for greater detail, shows that ASUSTeK Computer had debt of NT$16.4b at the end of December 2023, a reduction from NT$49.1b over a year. However, its balance sheet shows it holds NT$82.3b in cash, so it actually has NT$65.9b net cash.

A Look At ASUSTeK Computer's Liabilities

We can see from the most recent balance sheet that ASUSTeK Computer had liabilities of NT$197.6b falling due within a year, and liabilities of NT$23.5b due beyond that. Offsetting these obligations, it had cash of NT$82.3b as well as receivables valued at NT$88.2b due within 12 months. So it has liabilities totalling NT$50.6b more than its cash and near-term receivables, combined.

Since publicly traded ASUSTeK Computer shares are worth a total of NT$307.1b, it seems unlikely that this level of liabilities would be a major threat. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. Despite its noteworthy liabilities, ASUSTeK Computer boasts net cash, so it's fair to say it does not have a heavy debt load!

On the other hand, ASUSTeK Computer's EBIT dived 14%, over the last year. We think hat kind of performance, if repeated frequently, could well lead to difficulties for the stock. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine ASUSTeK Computer'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. ASUSTeK Computer 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 last three years, ASUSTeK Computer recorded free cash flow worth a fulsome 90% of its EBIT, which is stronger than we'd usually expect. That positions it well to pay down debt if desirable to do so.

Summing Up

Although ASUSTeK Computer'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$65.9b. And it impressed us with free cash flow of NT$52b, being 90% of its EBIT. So we are not troubled with ASUSTeK Computer's debt use. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. Case in point: We've spotted 1 warning sign for ASUSTeK Computer you should be aware of.

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.