Is FBR (ASX:FBR) Using Debt Sensibly?

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.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. We note that FBR Limited (ASX:FBR) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

When Is Debt Dangerous?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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 step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for FBR

What Is FBR's Debt?

You can click the graphic below for the historical numbers, but it shows that as of December 2022 FBR had AU$5.92m of debt, an increase on AU$902.7k, over one year. But on the other hand it also has AU$16.4m in cash, leading to a AU$10.4m net cash position.

How Strong Is FBR's Balance Sheet?

According to the last reported balance sheet, FBR had liabilities of AU$11.0m due within 12 months, and liabilities of AU$3.10m due beyond 12 months. On the other hand, it had cash of AU$16.4m and AU$9.51m worth of receivables due within a year. So it can boast AU$11.8m more liquid assets than total liabilities.

This short term liquidity is a sign that FBR could probably pay off its debt with ease, as its balance sheet is far from stretched. Simply put, the fact that FBR has more cash than debt is arguably a good indication that it can manage its debt safely. The balance sheet is clearly the area to focus on when you are analysing debt. But it is FBR's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

In the last year FBR wasn't profitable at an EBIT level, but managed to grow its revenue by 39%, to AU$882k. Shareholders probably have their fingers crossed that it can grow its way to profits.

So How Risky Is FBR?

By their very nature companies that are losing money are more risky than those with a long history of profitability. And in the last year FBR had an earnings before interest and tax (EBIT) loss, truth be told. And over the same period it saw negative free cash outflow of AU$29m and booked a AU$24m accounting loss. Given it only has net cash of AU$10.4m, the company may need to raise more capital if it doesn't reach break-even soon. FBR's revenue growth shone bright over the last year, so it may well be in a position to turn a profit in due course. By investing before those profits, shareholders take on more risk in the hope of bigger rewards. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. To that end, you should learn about the 5 warning signs we've spotted with FBR (including 3 which don't sit too well with us) .

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.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.