Warren Buffett famously said, '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 Francesca's Holdings Corporation (NASDAQ:FRAN) does use debt in its business. But the more important question is: how much risk is that debt creating?
What Risk Does Debt Bring?
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 frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we examine debt levels, we first consider both cash and debt levels, together.
How Much Debt Does Francesca's Holdings Carry?
You can click the graphic below for the historical numbers, but it shows that as of August 2019 Francesca's Holdings had US$10.0m of debt, an increase on none, over one year. However, it does have US$22.0m in cash offsetting this, leading to net cash of US$12.0m.
How Strong Is Francesca's Holdings's Balance Sheet?
The latest balance sheet data shows that Francesca's Holdings had liabilities of US$81.1m due within a year, and liabilities of US$223.9m falling due after that. Offsetting this, it had US$22.0m in cash and US$7.99m in receivables that were due within 12 months. So it has liabilities totalling US$275.1m more than its cash and near-term receivables, combined.
The deficiency here weighs heavily on the US$46.7m company itself, as if a child were struggling under the weight of an enormous back-pack full of books, his sports gear, and a trumpet." So we'd watch its balance sheet closely, without a doubt At the end of the day, Francesca's Holdings would probably need a major re-capitalization if its creditors were to demand repayment. Given that Francesca's Holdings has more cash than debt, we're pretty confident it can handle its debt, despite the fact that it has a lot of liabilities in total. 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 Francesca's Holdings 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, Francesca's Holdings made a loss at the EBIT level, and saw its revenue drop to US$408m, which is a fall of 11%. We would much prefer see growth.
So How Risky Is Francesca's Holdings?
By their very nature companies that are losing money are more risky than those with a long history of profitability. And in the last year Francesca's Holdings had negative earnings before interest and tax (EBIT), truth be told. Indeed, in that time it burnt through US$11m of cash and made a loss of US$46m. But at least it has US$12.0m on the balance sheet to spend on growth, near-term. Summing up, we're a little skeptical of this one, as it seems fairly risky in the absence of free cashflow. For riskier companies like Francesca's Holdings I always like to keep an eye on the long term profit and revenue trends. Fortunately, you can click to see our interactive graph of its profit, revenue, and operating cashflow.
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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