The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says '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. Importantly, Field Solutions Holdings Limited (ASX:FSG) does carry debt. But the more important question is: how much risk is that debt creating?
When Is Debt Dangerous?
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. 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, plenty of companies use debt to fund growth, without any negative consequences. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.
What Is Field Solutions Holdings's Net Debt?
You can click the graphic below for the historical numbers, but it shows that as of June 2019 Field Solutions Holdings had AU$1.56m of debt, an increase on none, over one year. However, it also had AU$367.2k in cash, and so its net debt is AU$1.19m.
How Healthy Is Field Solutions Holdings's Balance Sheet?
Zooming in on the latest balance sheet data, we can see that Field Solutions Holdings had liabilities of AU$2.91m due within 12 months and liabilities of AU$10.6k due beyond that. Offsetting these obligations, it had cash of AU$367.2k as well as receivables valued at AU$1.62m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by AU$927.6k.
Given Field Solutions Holdings has a market capitalization of AU$11.6m, 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. There's no doubt that we learn most about debt from the balance sheet. But it is Field Solutions Holdings's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.
Over 12 months, Field Solutions Holdings reported revenue of AU$8.8m, which is a gain of 18%, although it did not report any earnings before interest and tax. That rate of growth is a bit slow for our taste, but it takes all types to make a world.
Importantly, Field Solutions Holdings had negative earnings before interest and tax (EBIT), over the last year. To be specific the EBIT loss came in at AU$1.1m. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. So we think its balance sheet is a little strained, though not beyond repair. However, it doesn't help that it burned through AU$1.7m of cash over the last year. So suffice it to say we consider the stock very risky. When I consider a company to be a bit risky, I think it is responsible to check out whether insiders have been reporting any share sales. Luckily, you can click here ito see our graphic depicting Field Solutions Holdings insider transactions.
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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