We Think Foxconn Industrial Internet (SHSE:601138) Can Manage Its Debt With Ease

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.' 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 Foxconn Industrial Internet Co., Ltd. (SHSE:601138) makes use of debt. But should shareholders be worried about its use of debt?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. 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.

Check out our latest analysis for Foxconn Industrial Internet

What Is Foxconn Industrial Internet's Net Debt?

As you can see below, Foxconn Industrial Internet had CN¥38.2b of debt at September 2024, down from CN¥52.5b a year prior. However, it does have CN¥56.9b in cash offsetting this, leading to net cash of CN¥18.7b.

A Look At Foxconn Industrial Internet's Liabilities

According to the last reported balance sheet, Foxconn Industrial Internet had liabilities of CN¥156.9b due within 12 months, and liabilities of CN¥7.58b due beyond 12 months. 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 can boast 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. 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 18% over the last year, further increasing its ability to manage debt. When analysing debt levels, the balance sheet is the obvious place to start. 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, a company can only pay off debt with cold hard cash, not accounting profits. While Foxconn Industrial Internet has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. 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 we empathize with investors who find debt concerning, you should keep in mind that Foxconn Industrial Internet has net cash of CN¥18.7b, as well as more liquid assets than liabilities. And it impressed us with its EBIT growth of 18% over the last year. So is Foxconn Industrial Internet's debt a risk? It doesn't seem so to us. 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. For instance, we've identified 1 warning sign for Foxconn Industrial Internet 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.

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.