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Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. We note that FLYHT Aerospace Solutions Ltd. (CVE:FLY) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?
When Is Debt A Problem?
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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, together.
What Is FLYHT Aerospace Solutions's Net Debt?
As you can see below, at the end of June 2019, FLYHT Aerospace Solutions had CA$4.63m of debt, up from CA$2.37m a year ago. Click the image for more detail. However, because it has a cash reserve of CA$2.75m, its net debt is less, at about CA$1.89m.
A Look At FLYHT Aerospace Solutions's Liabilities
The latest balance sheet data shows that FLYHT Aerospace Solutions had liabilities of CA$4.56m due within a year, and liabilities of CA$4.93m falling due after that. Offsetting these obligations, it had cash of CA$2.75m as well as receivables valued at CA$4.07m due within 12 months. So its liabilities total CA$2.67m more than the combination of its cash and short-term receivables.
Given FLYHT Aerospace Solutions has a market capitalization of CA$32.8m, 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. The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since FLYHT Aerospace Solutions will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.
Over 12 months, FLYHT Aerospace Solutions reported revenue of CA$19m, which is a gain of 43%. With any luck the company will be able to grow its way to profitability.
Even though FLYHT Aerospace Solutions managed to grow its top line quite deftly, the cold hard truth is that it is losing money on the EBIT line. Indeed, it lost a very considerable CA$3.4m at the EBIT level. 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. Another cause for caution is that is bled CA$2.0m in negative free cash flow over the last twelve months. So in short it's a really risky stock. 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 FLYHT Aerospace Solutions insider transactions.
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.
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If you spot an error that warrants correction, please contact the editor at firstname.lastname@example.org. 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. Simply Wall St has no position in the stocks mentioned. Thank you for reading.