Here's Why Firan Technology Group (TSE:FTG) Can Manage Its Debt Responsibly

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.' 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 Firan Technology Group Corporation (TSE:FTG) makes use of debt. But the more important question is: how much risk is that debt creating?

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. 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 thing to do when considering how much debt a business uses is to look at its cash and debt together.

View our latest analysis for Firan Technology Group

What Is Firan Technology Group's Debt?

You can click the graphic below for the historical numbers, but it shows that Firan Technology Group had CA$4.75m of debt in March 2021, down from CA$5.09m, one year before. However, it does have CA$18.1m in cash offsetting this, leading to net cash of CA$13.3m.

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$16.6m falling due within a year, and liabilities of CA$13.7m due beyond that. On the other hand, it had cash of CA$18.1m and CA$14.2m worth of receivables due within a year. So it can boast CA$2.01m more liquid assets than total liabilities.

This surplus suggests that Firan Technology Group has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, 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's EBIT dived 13%, 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 ultimately the future profitability of the business will decide if Firan Technology Group can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. 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 generation warms our hearts like a puppy in a bumblebee suit.

Summing up

While it is always sensible to investigate a company's debt, in this case Firan Technology Group has CA$13.3m in net cash and a decent-looking balance sheet. The cherry on top was that in converted 131% of that EBIT to free cash flow, bringing in CA$9.3m. So we don't have any problem with Firan Technology Group's use of debt. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. For instance, we've identified 4 warning signs for Firan Technology Group that you should be aware of.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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