Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that '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. We note that Foxconn Industrial Internet Co., Ltd. (SHSE:601138) does have debt on its balance sheet. But is this debt a concern to shareholders?

When Is Debt Dangerous?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

What Is Foxconn Industrial Internet's Net Debt?

The image below, which you can click on for greater detail, shows that Foxconn Industrial Internet had debt of CN¥38.2b at the end of September 2024, a reduction from CN¥52.5b over a year. However, its balance sheet shows it holds CN¥56.9b in cash, so it actually has CN¥18.7b net cash.

How Strong Is Foxconn Industrial Internet's Balance Sheet?

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. On the other hand, it had cash of CN¥56.9b and CN¥118.7b worth of receivables due within a year. 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're focused on the future you can check out this free report showing analyst profit forecasts.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. 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 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¥18.7b, as well as more liquid assets than liabilities. And we liked the look of last year's 18% year-on-year EBIT growth. 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. We've identified 1 warning sign with Foxconn Industrial Internet , and understanding them should be part of your investment process.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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.