Is FBR (ASX:FBR) Weighed On By Its Debt Load?

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.' 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 can see that FBR Limited (ASX:FBR) does use debt in its business. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for FBR

What Is FBR's Debt?

The image below, which you can click on for greater detail, shows that FBR had debt of AU$2.47m at the end of June 2021, a reduction from AU$2.81m over a year. But on the other hand it also has AU$11.1m in cash, leading to a AU$8.65m net cash position.

A Look At FBR's Liabilities

We can see from the most recent balance sheet that FBR had liabilities of AU$5.82m falling due within a year, and liabilities of AU$321.7k due beyond that. Offsetting this, it had AU$11.1m in cash and AU$3.65m in receivables that were due within 12 months. So it actually has AU$8.63m more liquid assets than total liabilities.

This surplus suggests that FBR has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Simply put, the fact that FBR has more cash than debt is arguably a good indication that it can manage its debt safely. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since FBR will need earnings to service that debt. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

Given it has no significant operating revenue at the moment, shareholders will be hoping FBR can make progress and gain better traction for the business, before it runs low on cash.

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 we do note that FBR had an earnings before interest and tax (EBIT) loss, over the last year. Indeed, in that time it burnt through AU$16m of cash and made a loss of AU$9.3m. Given it only has net cash of AU$8.65m, the company may need to raise more capital if it doesn't reach break-even soon. Even though its balance sheet seems sufficiently liquid, debt always makes us a little nervous if a company doesn't produce free cash flow regularly. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. We've identified 5 warning signs with FBR (at least 2 which shouldn't be ignored) , and understanding them should be part of your investment process.

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.

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.

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