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. 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. We can see that Firan Technology Group Corporation (TSE:FTG) does use debt in its business. But the real question is whether this debt is making the company risky.
Why Does Debt Bring Risk?
Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Part and parcel of capitalism is the process of ‘creative destruction’ where failed businesses are mercilessly liquidated by their bankers. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. 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.
What Is Firan Technology Group’s Net Debt?
You can click the graphic below for the historical numbers, but it shows that Firan Technology Group had CA$5.09m of debt in February 2020, down from CA$7.93m, one year before. But on the other hand it also has CA$10.2m in cash, leading to a CA$5.06m net cash position.
How Healthy Is Firan Technology Group’s Balance Sheet?
We can see from the most recent balance sheet that Firan Technology Group had liabilities of CA$26.3m falling due within a year, and liabilities of CA$13.1m due beyond that. On the other hand, it had cash of CA$10.2m and CA$20.0m worth of receivables due within a year. So its liabilities total CA$9.31m more than the combination of its cash and short-term receivables.
This deficit isn’t so bad because Firan Technology Group is worth CA$39.3m, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. Despite its noteworthy liabilities, Firan Technology Group boasts net cash, so it’s fair to say it does not have a heavy debt load!
On the other hand, Firan Technology Group saw its EBIT drop by 4.9% in the last twelve months. If earnings continue to decline at that rate the company may have increasing difficulty managing its debt load. 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’re focused on the future you can check out this free report showing analyst profit forecasts.
Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. 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 last three years, Firan Technology Group recorded free cash flow worth a fulsome 99% of its EBIT, which is stronger than we’d usually expect. That positions it well to pay down debt if desirable to do so.
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$5.06m. And it impressed us with free cash flow of CA$14m, being 99% of its EBIT. So we are not troubled with Firan Technology Group’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. Be aware that Firan Technology Group is showing 3 warning signs in our investment analysis , 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. 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. Thank you for reading.