David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the 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 note that Firan Technology Group Corporation (TSE:FTG) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?
When Is Debt Dangerous?
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. If things get really bad, the lenders can take control of the business. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first step when considering a company's debt levels is to consider its cash and debt together.
What Is Firan Technology Group's Net Debt?
As you can see below, at the end of August 2020, Firan Technology Group had CA$7.10m of debt, up from CA$6.03m a year ago. Click the image for more detail. But it also has CA$15.7m in cash to offset that, meaning it has CA$8.61m net cash.
How Healthy Is Firan Technology Group's Balance Sheet?
The latest balance sheet data shows that Firan Technology Group had liabilities of CA$20.5m due within a year, and liabilities of CA$16.7m falling due after that. On the other hand, it had cash of CA$15.7m and CA$16.1m worth of receivables due within a year. So its liabilities total CA$5.43m more than the combination of its cash and short-term receivables.
Since publicly traded Firan Technology Group shares are worth a total of CA$46.5m, it seems unlikely that this level of liabilities would be a major threat. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. While it does have liabilities worth noting, Firan Technology Group also has more cash than debt, so we're pretty confident it can manage its debt safely.
It is just as well that Firan Technology Group's load is not too heavy, because its EBIT was down 44% over the last year. Falling earnings (if the trend continues) could eventually make even modest debt quite risky. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine Firan Technology Group's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.
Finally, a company can only pay off debt with cold hard cash, not accounting profits. Firan Technology Group 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, Firan Technology Group actually produced more free cash flow than EBIT. That sort of strong cash conversion gets us as excited as the crowd when the beat drops at a Daft Punk concert.
Although Firan Technology Group's balance sheet isn't particularly strong, due to the total liabilities, it is clearly positive to see that it has net cash of CA$8.61m. The cherry on top was that in converted 101% of that EBIT to free cash flow, bringing in CA$11m. So we don't have any problem with Firan Technology Group's use of debt. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. Consider risks, for instance. Every company has them, and we've spotted 4 warning signs for Firan Technology Group you should know about.
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.
This article by Simply Wall St is general in nature. 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.
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