Is Firan Technology Group (TSE:FTG) A Risky Investment?

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. Importantly, Firan Technology Group Corporation (TSE:FTG) does carry debt. But the real question is whether this debt is making the company risky.

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. 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.

See our latest analysis for Firan Technology Group

What Is Firan Technology Group's Net Debt?

As you can see below, at the end of November 2020, Firan Technology Group had CA$6.53m of debt, up from CA$5.50m a year ago. Click the image for more detail. But it also has CA$19.0m in cash to offset that, meaning it has CA$12.5m net cash.

How Strong Is Firan Technology Group's Balance Sheet?

According to the last reported balance sheet, Firan Technology Group had liabilities of CA$20.1m due within 12 months, and liabilities of CA$15.3m due beyond 12 months. Offsetting this, it had CA$19.0m in cash and CA$17.8m in receivables that were due within 12 months. So it can boast CA$1.42m 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!

The modesty of its debt load may become crucial for Firan Technology Group if management cannot prevent a repeat of the 30% cut to EBIT over the last year. When a company sees its earnings tank, it can sometimes find its relationships with its lenders turn sour. The balance sheet is clearly the area to focus on when you are analysing debt. 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.

Summing up

While it is always sensible to investigate a company's debt, in this case Firan Technology Group has CA$12.5m in net cash and a decent-looking balance sheet. The cherry on top was that in converted 119% of that EBIT to free cash flow, bringing in CA$13m. 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. However, not all investment risk resides within the balance sheet - far from it. For example, we've discovered 3 warning signs for Firan Technology Group that you should be aware of before investing here.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.
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