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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 note that 1-800-FLOWERS.COM, Inc. (NASDAQ:FLWS) does have debt on its balance sheet. But is this debt a concern to shareholders?
When Is Debt A Problem?
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. Ultimately, if the company can’t fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.
See our latest analysis for 1-800-FLOWERS.COM
What Is 1-800-FLOWERS.COM’s Net Debt?
As you can see below, 1-800-FLOWERS.COM had US$95.8m of debt at March 2019, down from US$104.3m a year prior. But it also has US$206.4m in cash to offset that, meaning it has US$110.6m net cash.
A Look At 1-800-FLOWERS.COM’s Liabilities
Zooming in on the latest balance sheet data, we can see that 1-800-FLOWERS.COM had liabilities of US$140.6m due within 12 months and liabilities of US$125.4m due beyond that. Offsetting these obligations, it had cash of US$206.4m as well as receivables valued at US$19.2m due within 12 months. So it has liabilities totalling US$40.5m more than its cash and near-term receivables, combined.
Given 1-800-FLOWERS.COM has a market capitalization of US$1.23b, 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. Given that 1-800-FLOWERS.COM has more cash than debt, we’re pretty confident it can manage its debt safely.
Also good is that 1-800-FLOWERS.COM grew its EBIT at 10% over the last year, further increasing its ability to manage debt. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if 1-800-FLOWERS.COM can strengthen its balance sheet over time. So if you’re focused on the future you can check out this free report showing analyst profit forecasts.
Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While 1-800-FLOWERS.COM has net cash on its balance sheet, it’s still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. Over the most recent three years, 1-800-FLOWERS.COM recorded free cash flow worth 75% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This free cash flow puts the company in a good position to pay down debt, when appropriate.
Summing up
While it is always sensible to look at a company’s total liabilities, it is very reassuring that 1-800-FLOWERS.COM has US$111m in net cash. And it impressed us with free cash flow of US$56m, being 75% of its EBIT. So we don’t think 1-800-FLOWERS.COM’s use of debt is risky. Over time, share prices tend to follow earnings per share, so if you’re interested in 1-800-FLOWERS.COM, you may well want to click here to check an interactive graph of its earnings per share history.
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.
We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.
If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. 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.