Forus (SNSE:FORUS) Has A Pretty Healthy Balance Sheet

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. We can see that Forus S.A. (SNSE:FORUS) does use debt in its business. But the more important question is: how much risk is that debt creating?

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. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

View our latest analysis for Forus

What Is Forus's Debt?

The image below, which you can click on for greater detail, shows that at December 2020 Forus had debt of CL$2.05b, up from CL$333.5m in one year. But on the other hand it also has CL$110.9b in cash, leading to a CL$108.8b net cash position.

How Healthy Is Forus' Balance Sheet?

The latest balance sheet data shows that Forus had liabilities of CL$37.8b due within a year, and liabilities of CL$25.7b falling due after that. Offsetting this, it had CL$110.9b in cash and CL$21.4b in receivables that were due within 12 months. So it can boast CL$68.8b more liquid assets than total liabilities.

It's good to see that Forus has plenty of liquidity on its balance sheet, suggesting conservative management of liabilities. Due to its strong net asset position, it is not likely to face issues with its lenders. Simply put, the fact that Forus has more cash than debt is arguably a good indication that it can manage its debt safely.

Shareholders should be aware that Forus's EBIT was down 65% last year. If that decline continues then paying off debt will be harder than selling foie gras at a vegan convention. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Forus 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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. While Forus has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. Over the last three years, Forus actually produced more free cash flow than EBIT. That sort of strong cash generation warms our hearts like a puppy in a bumblebee suit.

Summing up

While it is always sensible to investigate a company's debt, in this case Forus has CL$108.8b in net cash and a decent-looking balance sheet. And it impressed us with free cash flow of CL$41b, being 155% of its EBIT. So we are not troubled with Forus's debt use. 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. We've identified 1 warning sign with Forus , and understanding them should be part of your investment process.

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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