We Think FLYHT Aerospace Solutions (CVE:FLY) Has A Fair Chunk Of Debt

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.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. We can see that FLYHT Aerospace Solutions Ltd. (CVE:FLY) does use debt in its business. But is this debt a concern to shareholders?

When Is Debt A Problem?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. 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. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for FLYHT Aerospace Solutions

What Is FLYHT Aerospace Solutions's Debt?

You can click the graphic below for the historical numbers, but it shows that as of March 2024 FLYHT Aerospace Solutions had CA$5.35m of debt, an increase on CA$4.66m, over one year. However, it also had CA$1.36m in cash, and so its net debt is CA$3.99m.

How Strong Is FLYHT Aerospace Solutions' Balance Sheet?

According to the last reported balance sheet, FLYHT Aerospace Solutions had liabilities of CA$7.55m due within 12 months, and liabilities of CA$5.27m due beyond 12 months. On the other hand, it had cash of CA$1.36m and CA$3.52m worth of receivables due within a year. So it has liabilities totalling CA$7.95m more than its cash and near-term receivables, combined.

While this might seem like a lot, it is not so bad since FLYHT Aerospace Solutions has a market capitalization of CA$14.0m, and so it could probably strengthen its balance sheet by raising capital if it needed to. But it's clear that we should definitely closely examine whether it can manage its debt without dilution. The balance sheet is clearly the area to focus on when you are analysing debt. 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.

Over 12 months, FLYHT Aerospace Solutions made a loss at the EBIT level, and saw its revenue drop to CA$20m, which is a fall of 15%. That's not what we would hope to see.

Caveat Emptor

While FLYHT Aerospace Solutions's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. Indeed, it lost a very considerable CA$2.5m 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. Another cause for caution is that is bled CA$1.8m in negative free cash flow over the last twelve months. 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. For example, we've discovered 4 warning signs for FLYHT Aerospace Solutions (2 can't be ignored!) that you should be aware of before investing here.

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com