Here's Why FACC (VIE:FACC) Can Afford Some Debt

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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 FACC AG (VIE:FACC) does use debt in its business. But the more important question is: how much risk is that debt creating?

What Risk Does Debt Bring?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. 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. 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.

View our latest analysis for FACC

How Much Debt Does FACC Carry?

As you can see below, FACC had €206.4m of debt at March 2021, down from €246.6m a year prior. On the flip side, it has €42.4m in cash leading to net debt of about €163.9m.

A Look At FACC's Liabilities

According to the last reported balance sheet, FACC had liabilities of €198.1m due within 12 months, and liabilities of €180.3m due beyond 12 months. Offsetting this, it had €42.4m in cash and €146.9m in receivables that were due within 12 months. So its liabilities total €189.1m more than the combination of its cash and short-term receivables.

While this might seem like a lot, it is not so bad since FACC has a market capitalization of €429.1m, and so it could probably strengthen its balance sheet by raising capital if it needed to. However, it is still worthwhile taking a close look at its ability to pay off debt. The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine FACC's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Over 12 months, FACC made a loss at the EBIT level, and saw its revenue drop to €450m, which is a fall of 42%. To be frank that doesn't bode well.

Caveat Emptor

While FACC's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. Indeed, it lost a very considerable €54m at the EBIT level. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. However, it doesn't help that it burned through €6.5m of cash over the last year. So suffice it to say we do consider the stock to be risky. For riskier companies like FACC 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 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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