Would FLYHT Aerospace Solutions (CVE:FLY) Be Better Off With Less Debt?

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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 the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

Debt assists a business until the business has trouble paying it off, either with new capital or with free 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.

View 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 March 2020 FLYHT Aerospace Solutions had debt of CA$5.17m, up from CA$4.81m in one year. However, it also had CA$4.79m in cash, and so its net debt is CA$384.2k.

How Healthy Is FLYHT Aerospace Solutions's Balance Sheet?

According to the last reported balance sheet, FLYHT Aerospace Solutions had liabilities of CA$5.02m due within 12 months, and liabilities of CA$7.07m due beyond 12 months. On the other hand, it had cash of CA$4.79m and CA$6.67m worth of receivables due within a year. So it has liabilities totalling CA$635.7k more than its cash and near-term receivables, combined.

Since publicly traded FLYHT Aerospace Solutions shares are worth a total of CA$13.1m, it seems unlikely that this level of liabilities would be a major threat. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. The balance sheet is clearly the area to focus on when you are analysing debt. But it is FLYHT Aerospace Solutions's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Over 12 months, FLYHT Aerospace Solutions reported revenue of CA$21m, which is a gain of 35%, although it did not report any earnings before interest and tax. Shareholders probably have their fingers crossed that it can grow its way to profits.

Caveat Emptor

Despite the top line growth, FLYHT Aerospace Solutions still had negative earnings before interest and tax (EBIT), over the last year. 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. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. However, it doesn't help that it burned through CA$3.3m of cash over the last year. So in short it's a really risky stock. 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. Be aware that FLYHT Aerospace Solutions is showing 3 warning signs in our investment analysis , and 1 of those is concerning...

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.

If you’re looking to trade FLYHT Aerospace Solutions, open an account with the lowest-cost* platform trusted by professionals, Interactive Brokers. Their clients from over 200 countries and territories trade stocks, options, futures, forex, bonds and funds worldwide from a single integrated account. Promoted

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.
^*Interactive Brokers Rated Lowest Cost Broker by StockBrokers.com Annual Online Review 2020

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