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 Figeac Aero Société Anonyme (EPA:FGA) does use debt in its business. But the real question is whether this debt is making the company risky.
When Is Debt Dangerous?
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. 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.
What Is Figeac Aero Société Anonyme's Net Debt?
You can click the graphic below for the historical numbers, but it shows that as of September 2020 Figeac Aero Société Anonyme had €383.2m of debt, an increase on €362.5m, over one year. However, it does have €104.3m in cash offsetting this, leading to net debt of about €278.9m.
A Look At Figeac Aero Société Anonyme's Liabilities
We can see from the most recent balance sheet that Figeac Aero Société Anonyme had liabilities of €199.3m falling due within a year, and liabilities of €435.7m due beyond that. On the other hand, it had cash of €104.3m and €61.0m worth of receivables due within a year. So it has liabilities totalling €469.6m more than its cash and near-term receivables, combined.
The deficiency here weighs heavily on the €137.4m company itself, as if a child were struggling under the weight of an enormous back-pack full of books, his sports gear, and a trumpet. So we'd watch its balance sheet closely, without a doubt. At the end of the day, Figeac Aero Société Anonyme would probably need a major re-capitalization if its creditors were to demand repayment. 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 Figeac Aero Société Anonyme'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, Figeac Aero Société Anonyme made a loss at the EBIT level, and saw its revenue drop to €317m, which is a fall of 30%. That makes us nervous, to say the least.
Not only did Figeac Aero Société Anonyme's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). Indeed, it lost €4.7m at the EBIT level. Combining this information with the significant liabilities we already touched on makes us very hesitant about this stock, to say the least. Of course, it may be able to improve its situation with a bit of luck and good execution. But we think that is unlikely, given it is low on liquid assets, and burned through €27m in the last year. So we think this stock is risky, like walking through a dirty dog park with a mask on. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. Case in point: We've spotted 2 warning signs for Figeac Aero Société Anonyme you should be aware of, and 1 of them is concerning.
If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.
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