David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' 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. 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?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we think about a company's use of debt, we first look at cash and debt together.

What Is Foxconn Industrial Internet's Debt?

As you can see below, Foxconn Industrial Internet had CN¥33.8b of debt at June 2024, down from CN¥49.9b a year prior. But on the other hand it also has CN¥68.7b in cash, leading to a CN¥35.0b net cash position.

A Look At Foxconn Industrial Internet's Liabilities

We can see from the most recent balance sheet that Foxconn Industrial Internet had liabilities of CN¥146.4b falling due within a year, and liabilities of CN¥7.74b due beyond that. Offsetting this, it had CN¥68.7b in cash and CN¥102.5b in receivables that were due within 12 months. So it actually has CN¥17.1b 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!

And we also note warmly that Foxconn Industrial Internet grew its EBIT by 16% last year, making its debt load easier to handle. When analysing debt levels, the balance sheet is the obvious place to start. 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 business needs free cash flow to pay off debt; accounting profits just don't cut it. 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. During the last three years, Foxconn Industrial Internet produced sturdy free cash flow equating to 62% of its EBIT, about what we'd expect. This cold hard cash means it can reduce its debt when it wants to.

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¥35.0b, as well as more liquid assets than liabilities. And it impressed us with its EBIT growth of 16% over the last year. So is Foxconn Industrial Internet's debt a risk? It doesn't seem so to us. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. For instance, we've identified 2 warning signs 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.

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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.