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 should shareholders be worried about its use of debt?
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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. 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.
What Is Firan Technology Group's Debt?
The image below, which you can click on for greater detail, shows that Firan Technology Group had debt of CA$2.51m at the end of September 2021, a reduction from CA$7.10m over a year. However, its balance sheet shows it holds CA$19.5m in cash, so it actually has CA$17.0m net cash.
How Strong Is Firan Technology Group's Balance Sheet?
We can see from the most recent balance sheet that Firan Technology Group had liabilities of CA$16.2m falling due within a year, and liabilities of CA$11.9m due beyond that. Offsetting these obligations, it had cash of CA$19.5m as well as receivables valued at CA$14.3m due within 12 months. So it actually has CA$5.84m 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!
Shareholders should be aware that Firan Technology Group's EBIT was down 53% last year. If that earnings trend continues then paying off its debt will be about as easy as herding cats on to a roller coaster. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if Firan Technology Group can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.
Finally, while the tax-man may adore accounting profits, lenders only accept 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. Happily for any shareholders, Firan Technology Group actually produced more free cash flow than EBIT over the last three years. That sort of strong cash generation warms our hearts like a puppy in a bumblebee suit.
While we empathize with investors who find debt concerning, you should keep in mind that Firan Technology Group has net cash of CA$17.0m, as well as more liquid assets than liabilities. The cherry on top was that in converted 142% of that EBIT to free cash flow, bringing in CA$7.3m. So we don't have any problem with Firan Technology Group's use of debt. 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 2 warning signs for Firan Technology Group you should be aware of.
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.
Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.
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.