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 note that Flight Centre Travel Group Limited (ASX:FLT) does have debt on its balance sheet. But is this debt a concern to shareholders?

When Is Debt A Problem?

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, debt can be an important tool in businesses, particularly capital heavy businesses. 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 Flight Centre Travel Group

What Is Flight Centre Travel Group's Debt?

As you can see below, at the end of June 2022, Flight Centre Travel Group had AU$1.06b of debt, up from AU$915.1m a year ago. Click the image for more detail. However, it does have AU$866.2m in cash offsetting this, leading to net debt of about AU$196.3m.

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$1.63b due within 12 months, and liabilities of AU$1.33b due beyond 12 months. Offsetting these obligations, it had cash of AU$866.2m as well as receivables valued at AU$836.5m due within 12 months. So its liabilities total AU$1.25b more than the combination of its cash and short-term receivables.

This deficit isn't so bad because Flight Centre Travel Group is worth AU$3.17b, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine Flight Centre Travel Group's ability to maintain a healthy balance sheet going forward. 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$1.0b, which is a gain of 147%, although it did not report any earnings before interest and tax. So its pretty obvious shareholders are hoping for more growth!

Caveat Emptor

While we can certainly appreciate Flight Centre Travel Group's revenue growth, its earnings before interest and tax (EBIT) loss is not ideal. Its EBIT loss was a whopping AU$383m. 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. So we think its balance sheet is a little strained, though not beyond repair. However, it doesn't help that it burned through AU$142m of cash over the last year. So to be blunt we think it is risky. For riskier companies like Flight Centre Travel Group I always like to keep an eye on whether insiders are buying or selling. So click here if you want to find out for yourself.

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. 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.