Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. As with many other companies Firan Technology Group Corporation (TSE:FTG) makes use of debt. But the more important question is: how much risk is that debt creating?
What Risk Does Debt Bring?
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. 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, plenty of companies use debt to fund growth, without any negative consequences. When we think about a company's use of debt, we first look at cash and debt together.
How Much Debt Does Firan Technology Group Carry?
You can click the graphic below for the historical numbers, but it shows that Firan Technology Group had CA$5.50m of debt in November 2019, down from CA$7.43m, one year before. But it also has CA$7.65m in cash to offset that, meaning it has CA$2.14m net cash.
How Healthy Is Firan Technology Group's Balance Sheet?
Zooming in on the latest balance sheet data, we can see that Firan Technology Group had liabilities of CA$24.3m due within 12 months and liabilities of CA$1.30m due beyond that. On the other hand, it had cash of CA$7.65m and CA$21.5m worth of receivables due within a year. So it can boast CA$3.55m more liquid assets than total liabilities.
This short term liquidity is a sign that Firan Technology Group could probably pay off its debt with ease, as its balance sheet is far from stretched. Simply put, the fact that Firan Technology Group has more cash than debt is arguably a good indication that it can manage its debt safely.
On top of that, Firan Technology Group grew its EBIT by 63% over the last twelve months, and that growth will make it easier to handle its debt. When analysing debt levels, the balance sheet is the obvious place to start. 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 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. While Firan Technology Group has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. Over the most recent three years, Firan Technology Group recorded free cash flow worth 77% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This free cash flow puts the company in a good position to pay down debt, when appropriate.
While it is always sensible to investigate a company's debt, in this case Firan Technology Group has CA$2.14m in net cash and a decent-looking balance sheet. And we liked the look of last year's 63% year-on-year EBIT growth. So we don't think Firan Technology Group'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. Consider risks, for instance. Every company has them, and we've spotted 2 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.
If you spot an error that warrants correction, please contact the editor at email@example.com. 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. Simply Wall St has no position in the stocks mentioned.
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