Is Flight Centre Travel Group (ASX:FLT) A Risky Investment?

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. We can see that Flight Centre Travel Group Limited (ASX:FLT) does use debt in its business. But should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for Flight Centre Travel Group

What Is Flight Centre Travel Group's Net Debt?

The image below, which you can click on for greater detail, shows that at December 2020 Flight Centre Travel Group had debt of AU$914.0m, up from AU$214.4m in one year. However, it does have AU$1.61b in cash offsetting this, leading to net cash of AU$696.5m.

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$1.37b due within 12 months, and liabilities of AU$988.8m due beyond 12 months. Offsetting this, it had AU$1.61b in cash and AU$368.5m in receivables that were due within 12 months. So it has liabilities totalling AU$380.9m more than its cash and near-term receivables, combined.

Given Flight Centre Travel Group has a market capitalization of AU$3.77b, it's hard to believe these liabilities pose much threat. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. Despite its noteworthy liabilities, Flight Centre Travel Group boasts net cash, so it's fair to say it does not have a heavy debt load! When analysing debt levels, the balance sheet is the obvious place to start. 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're focused on the future you can check out this free report showing analyst profit forecasts.

In the last year Flight Centre Travel Group had a loss before interest and tax, and actually shrunk its revenue by 84%, to AU$511m. To be frank that doesn't bode well.

So How Risky Is Flight Centre Travel Group?

We have no doubt that loss making companies are, in general, riskier than profitable ones. And in the last year Flight Centre Travel Group 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$590m and booked a AU$917m accounting loss. Given it only has net cash of AU$696.5m, the company may need to raise more capital if it doesn't reach break-even soon. Summing up, we're a little skeptical of this one, as it seems fairly risky in the absence of free cashflow. 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. These risks can be hard to spot. Every company has them, and we've spotted 3 warning signs for Flight Centre Travel Group (of which 2 can't be ignored!) you should know about.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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. 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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