Foxconn Industrial Internet (SHSE:601138) Could Easily Take On More Debt

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. Importantly, Foxconn Industrial Internet Co., Ltd. (SHSE:601138) does carry debt. But the real question is whether this debt is making the company risky.

When Is Debt A Problem?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. If things get really bad, the lenders can take control of the business. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

See our latest analysis for Foxconn Industrial Internet

What Is Foxconn Industrial Internet's Net Debt?

You can click the graphic below for the historical numbers, but it shows that Foxconn Industrial Internet had CN¥38.2b of debt in September 2024, down from CN¥52.5b, one year before. But it also has CN¥56.9b in cash to offset that, meaning it has CN¥18.7b net cash.

A Look At Foxconn Industrial Internet's Liabilities

Zooming in on the latest balance sheet data, we can see that Foxconn Industrial Internet had liabilities of CN¥156.9b due within 12 months and liabilities of CN¥7.58b due beyond that. Offsetting these obligations, it had cash of CN¥56.9b as well as receivables valued at CN¥118.7b due within 12 months. So it actually has CN¥11.1b more liquid assets than total liabilities.

This short term liquidity is a sign that Foxconn Industrial Internet could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, Foxconn Industrial Internet boasts net cash, so it's fair to say it does not have a heavy debt load!

Also good is that Foxconn Industrial Internet grew its EBIT at 18% over the last year, further increasing its ability to manage debt. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine Foxconn Industrial Internet'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. Foxconn Industrial Internet 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 most recent three years, Foxconn Industrial Internet recorded free cash flow worth 65% 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.

Summing Up

While it is always sensible to investigate a company's debt, in this case Foxconn Industrial Internet has CN¥18.7b in net cash and a decent-looking balance sheet. And it impressed us with its EBIT growth of 18% over the last year. So we don't think Foxconn Industrial Internet's use of debt is risky. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. For example, we've discovered 1 warning sign for Foxconn Industrial Internet that you should be aware of before investing here.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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.