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. As with many other companies 1-800-FLOWERS.COM, Inc. (NASDAQ:FLWS) makes use of debt. But is this debt a concern to shareholders?
What Risk Does Debt Bring?
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.
What Is 1-800-FLOWERS.COM's Debt?
You can click the graphic below for the historical numbers, but it shows that 1-800-FLOWERS.COM had US$97.0m of debt in June 2019, down from US$102.3m, one year before. But on the other hand it also has US$172.9m in cash, leading to a US$76.0m net cash position.
How Strong Is 1-800-FLOWERS.COM's Balance Sheet?
According to the last reported balance sheet, 1-800-FLOWERS.COM had liabilities of US$127.5m due within 12 months, and liabilities of US$136.2m due beyond 12 months. Offsetting this, it had US$172.9m in cash and US$12.4m in receivables that were due within 12 months. So it has liabilities totalling US$78.4m more than its cash and near-term receivables, combined.
Given 1-800-FLOWERS.COM has a market capitalization of US$912.1m, it's hard to believe these liabilities pose much threat. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. While it does have liabilities worth noting, 1-800-FLOWERS.COM also has more cash than debt, so we're pretty confident it can manage its debt safely.
The good news is that 1-800-FLOWERS.COM has increased its EBIT by 9.4% over twelve months, which should ease any concerns about debt repayment. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine 1-800-FLOWERS.COM's ability to maintain a healthy balance sheet going forward. 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. 1-800-FLOWERS.COM 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. Over the most recent three years, 1-800-FLOWERS.COM recorded free cash flow worth 72% 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.
While it is always sensible to look at a company's total liabilities, it is very reassuring that 1-800-FLOWERS.COM has US$76.0m in net cash. And it impressed us with free cash flow of US$46m, being 72% of its EBIT. So is 1-800-FLOWERS.COM's debt a risk? It doesn't seem so to us. Over time, share prices tend to follow earnings per share, so if you're interested in 1-800-FLOWERS.COM, you may well want to click here to check an interactive graph of its earnings per share history.
If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.
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