Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett said “volatility is far from risk.” It is only natural to consider a company’s balance sheet when considering how risky it is, as debt is often involved when a business collapses. We note that FireAngel Safety Technology Group plc (LON: FA.) Has debt on its balance sheet. But the most important question is: what risk does this debt create?
When Is Debt a Problem?
Debt helps a business until the business struggles to repay it, either with new capital or with free cash flow. An integral part of capitalism is the process of “creative destruction” where bankrupt companies are ruthlessly liquidated by their bankers. However, a more common (but still costly) event is when a company has to issue stock at bargain prices, constantly diluting shareholders, just to strengthen its balance sheet. That said, the most common situation is where a business manages its debt reasonably well – and to its own advantage. When we look at debt levels, we first look at cash and debt levels, together.
See our latest review for FireAngel Safety Technology Group
What is the debt of the FireAngel Safety Technology group?
The image below, which you can click for more details, shows that as of June 2021, FireAngel Safety Technology Group was in debt of Â£ 3.63million, up from Â£ 2.54million in one. year. But he also has Â£ 5.84million in cash to make up for that, meaning he has Â£ 2.21million in net cash.
How healthy is the FireAngel Safety Technology group’s balance sheet?
We can see from the most recent balance sheet that FireAngel Safety Technology Group had debts of Â£ 12.5million due within one year and debts of Â£ 4.66million due beyond that. . On the other hand, he had cash of Â£ 5.84million and Â£ 10.5million in receivables due within one year. It therefore has a liability totaling Â£ 856.0k more than its cash and short-term receivables combined.
Of course, FireAngel Safety Technology Group has a market cap of Â£ 24.4million, so this liability is likely manageable. However, we think it’s worth keeping an eye on the strength of its balance sheet as it can change over time. Despite its notable liabilities, FireAngel Safety Technology Group has net cash, so it’s fair to say it doesn’t have a lot of debt! When analyzing debt levels, the balance sheet is the obvious starting point. But ultimately, the company’s future profitability will decide whether FireAngel Safety Technology Group can strengthen its balance sheet over time. So, if you want to see what the professionals think, you might find this free analyst earnings forecast report interesting.
Over the past year, FireAngel Safety Technology Group has not been profitable on EBIT level, but has managed to increase revenue by 11%, to Â£ 46million. This rate of growth is a bit slow for our taste, but it takes all types to make a world.
So how risky is the FireAngel Safety Technology Group?
Statistically speaking, businesses that lose money are riskier than those that earn it. And over the past year, FireAngel Safety Technology Group has recorded a loss of earnings before interest and taxes (EBIT), frankly. And during the same period, it recorded a negative free cash outflow of Â£ 4.7million and a book loss of Â£ 7.5million. With just Â£ 2.21million on the balance sheet, it looks like capital will have to be raised again soon. Overall we would say the stock is a bit risky and we are generally very cautious until we see positive free cash flow. The balance sheet is clearly the area to focus on when analyzing debt. However, not all investment risks lie on the balance sheet – far from it. These risks can be difficult to spot. Every business has them, and we’ve spotted 3 warning signs for FireAngel Safety Technology Group you should know.
At the end of the day, it’s often best to focus on businesses with no net debt. You can access our special list of these companies (all with a history of profit growth). It’s free.
This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts using only unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell shares and does not take into account your goals or your financial situation. Our aim is to bring you long-term, targeted analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price sensitive companies or qualitative documents. Simply Wall St has no position in the mentioned stocks.
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