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Is Flux Power Holdings (NASDAQ:FLUX) Using Debt In A Risky Way?

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.' 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. We can see that Flux Power Holdings, Inc. (NASDAQ:FLUX) does use debt in its business. But the more important question is: how much risk is that debt creating?

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. 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 thing to do when considering how much debt a business uses is to look at its cash and debt together.

View our latest analysis for Flux Power Holdings

What Is Flux Power Holdings's Debt?

As you can see below, Flux Power Holdings had US$3.70m of debt at December 2020, down from US$13.4m a year prior. But on the other hand it also has US$4.65m in cash, leading to a US$953.0k net cash position.

debt-equity-history-analysis
debt-equity-history-analysis

How Strong Is Flux Power Holdings' Balance Sheet?

We can see from the most recent balance sheet that Flux Power Holdings had liabilities of US$10.9m falling due within a year, and liabilities of US$3.09m due beyond that. Offsetting these obligations, it had cash of US$4.65m as well as receivables valued at US$4.46m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by US$4.85m.

Given Flux Power Holdings has a market capitalization of US$147.9m, it's hard to believe these liabilities pose much threat. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. Despite its noteworthy liabilities, Flux Power Holdings boasts net cash, so it's fair to say it does not have a heavy debt load! The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine Flux Power Holdings'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.

Over 12 months, Flux Power Holdings reported revenue of US$22m, which is a gain of 115%, although it did not report any earnings before interest and tax. So its pretty obvious shareholders are hoping for more growth!

So How Risky Is Flux Power Holdings?

We have no doubt that loss making companies are, in general, riskier than profitable ones. And we do note that Flux Power Holdings had an earnings before interest and tax (EBIT) loss, over the last year. Indeed, in that time it burnt through US$15m of cash and made a loss of US$15m. With only US$953.0k on the balance sheet, it would appear that its going to need to raise capital again soon. Importantly, Flux Power Holdings's revenue growth is hot to trot. High growth pre-profit companies may well be risky, but they can also offer great rewards. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. For example Flux Power Holdings has 5 warning signs (and 2 which are significant) we think you should know about.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

This article by Simply Wall St is general in nature. 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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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