Is Feintool International Holding (VTX:FTON) Using Too Much 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.' 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 note that Feintool International Holding AG (VTX:FTON) does have debt on its balance sheet. But is this debt a concern to shareholders?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for Feintool International Holding

What Is Feintool International Holding's Debt?

The image below, which you can click on for greater detail, shows that at June 2020 Feintool International Holding had debt of CHF188.5m, up from CHF167.8m in one year. However, it does have CHF62.9m in cash offsetting this, leading to net debt of about CHF125.6m.

How Strong Is Feintool International Holding's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Feintool International Holding had liabilities of CHF142.3m due within 12 months and liabilities of CHF261.1m due beyond that. Offsetting this, it had CHF62.9m in cash and CHF75.1m in receivables that were due within 12 months. So it has liabilities totalling CHF265.4m more than its cash and near-term receivables, combined.

This deficit is considerable relative to its market capitalization of CHF271.7m, so it does suggest shareholders should keep an eye on Feintool International Holding's use of debt. This suggests shareholders would be heavily diluted if the company needed to shore up its balance sheet in a hurry. 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 Feintool International Holding 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 Feintool International Holding had a loss before interest and tax, and actually shrunk its revenue by 24%, to CHF513m. To be frank that doesn't bode well.

Caveat Emptor

Not only did Feintool International Holding's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). To be specific the EBIT loss came in at CHF8.9m. 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. For example, we would not want to see a repeat of last year's loss of CHF12m. 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. To that end, you should be aware of the 1 warning sign we've spotted with Feintool International Holding .

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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