Health Check: How Prudently Does Flight Centre Travel Group (ASX:FLT) Use Debt?

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. Importantly, Flight Centre Travel Group Limited (ASX:FLT) does carry debt. But should shareholders be worried about its use of debt?

When Is Debt Dangerous?

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. 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 think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for Flight Centre Travel Group

How Much Debt Does Flight Centre Travel Group Carry?

The image below, which you can click on for greater detail, shows that at December 2021 Flight Centre Travel Group had debt of AU$1.24b, up from AU$914.0m in one year. However, its balance sheet shows it holds AU$1.27b in cash, so it actually has AU$22.3m net cash.

How Strong Is Flight Centre Travel Group's Balance Sheet?

According to the last reported balance sheet, Flight Centre Travel Group had liabilities of AU$1.31b due within 12 months, and liabilities of AU$1.32b due beyond 12 months. Offsetting this, it had AU$1.27b in cash and AU$472.6m in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by AU$893.4m.

While this might seem like a lot, it is not so bad since Flight Centre Travel Group has a market capitalization of AU$3.63b, and so it could probably strengthen its balance sheet by raising capital if it needed to. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. While it does have liabilities worth noting, Flight Centre Travel Group also has more cash than debt, so we're pretty confident it can manage its debt safely. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if Flight Centre Travel Group can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Over 12 months, Flight Centre Travel Group reported revenue of AU$552m, which is a gain of 8.3%, although it did not report any earnings before interest and tax. That rate of growth is a bit slow for our taste, but it takes all types to make a world.

So How Risky Is Flight Centre Travel Group?

Statistically speaking companies that lose money are riskier than those that make money. And in the last year Flight Centre Travel Group had an earnings before interest and tax (EBIT) loss, truth be told. Indeed, in that time it burnt through AU$512m of cash and made a loss of AU$397m. Given it only has net cash of AU$22.3m, the company may need to raise more capital if it doesn't reach break-even soon. Overall, we'd say the stock is a bit risky, and we're usually very cautious until we see positive free cash flow. When we look at a riskier company, we like to check how their profits (or losses) are trending over time. Today, we're providing readers this interactive graph showing how Flight Centre Travel Group's profit, revenue, and operating cashflow have changed over the last few years.

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.