Foxconn Industrial Internet (SHSE:601138) Seems To Use Debt Rather Sparingly

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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. We note that Foxconn Industrial Internet Co., Ltd. (SHSE:601138) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

What Risk Does Debt Bring?

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 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.

See our latest analysis for Foxconn Industrial Internet

What Is Foxconn Industrial Internet's Debt?

You can click the graphic below for the historical numbers, but it shows that Foxconn Industrial Internet had CN¥38.8b of debt in March 2024, down from CN¥50.2b, one year before. However, it does have CN¥80.2b in cash offsetting this, leading to net cash of CN¥41.4b.

How Strong Is Foxconn Industrial Internet's Balance Sheet?

The latest balance sheet data shows that Foxconn Industrial Internet had liabilities of CN¥124.8b due within a year, and liabilities of CN¥6.01b falling due after that. Offsetting this, it had CN¥80.2b in cash and CN¥82.0b in receivables that were due within 12 months. So it can boast CN¥31.4b 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. Simply put, the fact that Foxconn Industrial Internet has more cash than debt is arguably a good indication that it can manage its debt safely.

Also good is that Foxconn Industrial Internet grew its EBIT at 10% over the last year, further increasing its ability to manage debt. 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 Foxconn Industrial Internet 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. 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. During the last three years, Foxconn Industrial Internet produced sturdy free cash flow equating to 66% of its EBIT, about what we'd expect. This free cash flow puts the company in a good position to pay down debt, when appropriate.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Foxconn Industrial Internet has net cash of CN¥41.4b, as well as more liquid assets than liabilities. 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. Be aware that Foxconn Industrial Internet is showing 2 warning signs in our investment analysis , you should know about...

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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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.