Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. Importantly, TechnipFMC plc (NYSE:FTI) does carry debt. But is this debt a concern to shareholders?
What Risk Does Debt Bring?
Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. If things get really bad, the lenders can take control of the business. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. The first step when considering a company's debt levels is to consider its cash and debt together.
What Is TechnipFMC's Net Debt?
The image below, which you can click on for greater detail, shows that at September 2019 TechnipFMC had debt of US$3.91b, up from US$4.1k in one year. However, it does have US$4.50b in cash offsetting this, leading to net cash of US$596.2m.
How Strong Is TechnipFMC's Balance Sheet?
Zooming in on the latest balance sheet data, we can see that TechnipFMC had liabilities of US$9.40b due within 12 months and liabilities of US$5.22b due beyond that. Offsetting this, it had US$4.50b in cash and US$4.55b in receivables that were due within 12 months. So it has liabilities totalling US$5.56b more than its cash and near-term receivables, combined.
TechnipFMC has a market capitalization of US$9.54b, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. Despite its noteworthy liabilities, TechnipFMC boasts net cash, so it's fair to say it does not have a heavy debt load!
The bad news is that TechnipFMC saw its EBIT decline by 20% over the last year. If earnings continue to decline at that rate then handling the debt will be more difficult than taking three children under 5 to a fancy pants restaurant. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if TechnipFMC can strengthen its balance sheet over time. 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. TechnipFMC 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 last three years, TechnipFMC saw substantial negative free cash flow, in total. While that may be a result of expenditure for growth, it does make the debt far more risky.
Although TechnipFMC's balance sheet isn't particularly strong, due to the total liabilities, it is clearly positive to see that it has net cash of US$596.2m. Despite its cash we think that TechnipFMC seems to struggle to convert EBIT to free cash flow, so we are wary of the stock. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. To that end, you should be aware of the 2 warning signs we've spotted with TechnipFMC .
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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