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

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the 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. Importantly, FLYHT Aerospace Solutions Ltd. (CVE:FLY) does carry debt. But is this debt a concern to shareholders?

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 usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

Check out our latest analysis for FLYHT Aerospace Solutions

What Is FLYHT Aerospace Solutions's Debt?

The image below, which you can click on for greater detail, shows that at September 2020 FLYHT Aerospace Solutions had debt of CA$5.37m, up from CA$4.66m in one year. However, because it has a cash reserve of CA$5.03m, its net debt is less, at about CA$346.8k.

A Look At FLYHT Aerospace Solutions' Liabilities

The latest balance sheet data shows that FLYHT Aerospace Solutions had liabilities of CA$4.10m due within a year, and liabilities of CA$7.02m falling due after that. Offsetting these obligations, it had cash of CA$5.03m as well as receivables valued at CA$3.88m due within 12 months. So its liabilities total CA$2.22m more than the combination of its cash and short-term receivables.

Of course, FLYHT Aerospace Solutions has a market capitalization of CA$20.0m, so these liabilities are probably manageable. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine FLYHT Aerospace Solutions'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.

In the last year FLYHT Aerospace Solutions had a loss before interest and tax, and actually shrunk its revenue by 30%, to CA$15m. To be frank that doesn't bode well.

Caveat Emptor

Not only did FLYHT Aerospace Solutions's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). Indeed, it lost a very considerable CA$3.2m at the EBIT level. 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 CA$2.7m of cash over the last year. So in short it's a really risky stock. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. Case in point: We've spotted 2 warning signs for FLYHT Aerospace Solutions you should be aware of.

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. 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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