Is Foxconn Technology (TWSE:2354) A Risky Investment?

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. Importantly, Foxconn Technology Co., Ltd. (TWSE:2354) does carry debt. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

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. If things get really bad, the lenders can take control of the business. 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for Foxconn Technology

How Much Debt Does Foxconn Technology Carry?

The image below, which you can click on for greater detail, shows that at March 2024 Foxconn Technology had debt of NT$9.14b, up from NT$7.10b in one year. However, it does have NT$59.8b in cash offsetting this, leading to net cash of NT$50.7b.

How Healthy Is Foxconn Technology's Balance Sheet?

According to the last reported balance sheet, Foxconn Technology had liabilities of NT$26.0b due within 12 months, and liabilities of NT$1.01b due beyond 12 months. On the other hand, it had cash of NT$59.8b and NT$9.71b worth of receivables due within a year. So it can boast NT$42.5b more liquid assets than total liabilities.

This luscious liquidity implies that Foxconn Technology's balance sheet is sturdy like a giant sequoia tree. On this view, lenders should feel as safe as the beloved of a black-belt karate master. Succinctly put, Foxconn Technology boasts net cash, so it's fair to say it does not have a heavy debt load!

It is just as well that Foxconn Technology's load is not too heavy, because its EBIT was down 55% over the last year. Falling earnings (if the trend continues) could eventually make even modest debt quite risky. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if Foxconn Technology can strengthen its balance sheet over time. 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. While Foxconn Technology 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. Happily for any shareholders, Foxconn Technology actually produced more free cash flow than EBIT over the last three years. 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 Foxconn Technology has NT$50.7b in net cash and a decent-looking balance sheet. And it impressed us with free cash flow of NT$2.0b, being 112% of its EBIT. So is Foxconn Technology'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. We've identified 2 warning signs with Foxconn Technology (at least 1 which doesn't sit too well with us) , and understanding them should be part of your investment process.

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.