Stock Analysis

Is FLYHT Aerospace Solutions (CVE:FLY) Using Debt Sensibly?

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Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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 FLYHT Aerospace Solutions Ltd. (CVE:FLY) does use debt in its business. But the real question is whether this debt is making the company risky.

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for FLYHT Aerospace Solutions

What Is FLYHT Aerospace Solutions's Net Debt?

You can click the graphic below for the historical numbers, but it shows that FLYHT Aerospace Solutions had CA$3.65m of debt in September 2021, down from CA$5.37m, one year before. However, its balance sheet shows it holds CA$5.81m in cash, so it actually has CA$2.15m net cash.

TSXV:FLY Debt to Equity History November 26th 2021

How Strong Is FLYHT Aerospace Solutions' Balance Sheet?

According to the last reported balance sheet, FLYHT Aerospace Solutions had liabilities of CA$3.36m due within 12 months, and liabilities of CA$4.97m due beyond 12 months. Offsetting these obligations, it had cash of CA$5.81m as well as receivables valued at CA$2.15m due within 12 months. So it has liabilities totalling CA$371.2k more than its cash and near-term receivables, combined.

This state of affairs indicates that FLYHT Aerospace Solutions' balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So it's very unlikely that the CA$25.1m company is short on cash, but still worth keeping an eye on the balance sheet. Despite its noteworthy liabilities, FLYHT Aerospace Solutions boasts net cash, so it's fair to say it does not have a heavy debt load! There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if FLYHT Aerospace Solutions 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.

In the last year FLYHT Aerospace Solutions had a loss before interest and tax, and actually shrunk its revenue by 16%, to CA$12m. We would much prefer see growth.

So How Risky Is FLYHT Aerospace Solutions?

We have no doubt that loss making companies are, in general, riskier than profitable ones. And in the last year FLYHT Aerospace Solutions had an earnings before interest and tax (EBIT) loss, truth be told. Indeed, in that time it burnt through CA$4.8m of cash and made a loss of CA$5.4m. However, it has net cash of CA$2.15m, so it has a bit of time before it will need more capital. Summing up, we're a little skeptical of this one, as it seems fairly risky in the absence of free cashflow. 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. These risks can be hard to spot. Every company has them, and we've spotted 5 warning signs for FLYHT Aerospace Solutions (of which 1 shouldn't be ignored!) you should know about.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

Valuation is complex, but we're helping make it simple.

Find out whether FLYHT Aerospace Solutions is potentially over or undervalued by checking out our comprehensive analysis, which includes fair value estimates, risks and warnings, dividends, insider transactions and financial health.

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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.

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