Is Fiat Chrysler Automobiles (BIT:FCA) A Risky Investment?

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. As with many other companies Fiat Chrysler Automobiles N.V. (BIT:FCA) makes use of debt. But the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

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 common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. 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. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for Fiat Chrysler Automobiles

How Much Debt Does Fiat Chrysler Automobiles Carry?

The image below, which you can click on for greater detail, shows that Fiat Chrysler Automobiles had debt of €13.4b at the end of June 2019, a reduction from €16.4b over a year. But it also has €15.9b in cash to offset that, meaning it has €2.50b net cash.

How Healthy Is Fiat Chrysler Automobiles's Balance Sheet?

The latest balance sheet data shows that Fiat Chrysler Automobiles had liabilities of €46.5b due within a year, and liabilities of €25.4b falling due after that. Offsetting this, it had €15.9b in cash and €4.43b in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by €51.6b.

The deficiency here weighs heavily on the €19.7b 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 definitely think shareholders need to watch this one closely. At the end of the day, Fiat Chrysler Automobiles would probably need a major re-capitalization if its creditors were to demand repayment. Given that Fiat Chrysler Automobiles 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.

On the other hand, Fiat Chrysler Automobiles's EBIT dived 14%, over the last year. We think hat kind of performance, if repeated frequently, could well lead to difficulties for the stock. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine Fiat Chrysler Automobiles's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. Fiat Chrysler Automobiles 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. During the last three years, Fiat Chrysler Automobiles produced sturdy free cash flow equating to 51% of its EBIT, about what we'd expect. This cold hard cash means it can reduce its debt when it wants to.

Summing up

Although Fiat Chrysler Automobiles's balance sheet isn't particularly strong, due to the total liabilities, it is clearly positive to see that it has net cash of €2.50b. Despite its cash we think that Fiat Chrysler Automobiles seems to struggle to handle its total liabilities, so we are wary of the stock. Given our hesitation about the stock, it would be good to know if Fiat Chrysler Automobiles insiders have sold any shares recently. You click here to find out if insiders have sold recently.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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.