Does FLSmidth (CPH:FLS) Have A Healthy Balance Sheet?

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.' 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 FLSmidth & Co. A/S (CPH:FLS) does use debt in its business. But the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

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. If things get really bad, the lenders can take control of the business. 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, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for FLSmidth

What Is FLSmidth's Debt?

You can click the graphic below for the historical numbers, but it shows that FLSmidth had kr.800.0m of debt in June 2022, down from kr.2.21b, one year before. But it also has kr.1.64b in cash to offset that, meaning it has kr.839.0m net cash.

How Strong Is FLSmidth's Balance Sheet?

The latest balance sheet data shows that FLSmidth had liabilities of kr.10.8b due within a year, and liabilities of kr.2.72b falling due after that. Offsetting this, it had kr.1.64b in cash and kr.8.74b in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by kr.3.10b.

This deficit isn't so bad because FLSmidth is worth kr.9.85b, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. But it's clear that we should definitely closely examine whether it can manage its debt without dilution. Despite its noteworthy liabilities, FLSmidth boasts net cash, so it's fair to say it does not have a heavy debt load!

Better yet, FLSmidth grew its EBIT by 129% last year, which is an impressive improvement. If maintained that growth will make the debt even more manageable in the years ahead. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine FLSmidth's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. While FLSmidth 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. During the last three years, FLSmidth generated free cash flow amounting to a very robust 89% of its EBIT, more than we'd expect. That positions it well to pay down debt if desirable to do so.

Summing Up

Although FLSmidth's balance sheet isn't particularly strong, due to the total liabilities, it is clearly positive to see that it has net cash of kr.839.0m. The cherry on top was that in converted 89% of that EBIT to free cash flow, bringing in kr.68m. So is FLSmidth's debt a risk? It doesn't seem so to us. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. Be aware that FLSmidth is showing 1 warning sign in our investment analysis , you should know about...

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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.