FireAngel Safety Technology Group (LON:FA.) Is Making Moderate Use Of Debt

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. Importantly, FireAngel Safety Technology Group plc (LON:FA.) does carry debt. But the more important question is: how much risk is that debt creating?

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. 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. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for FireAngel Safety Technology Group

What Is FireAngel Safety Technology Group's Debt?

As you can see below, at the end of June 2022, FireAngel Safety Technology Group had UK£4.48m of debt, up from UK£3.63m a year ago. Click the image for more detail. However, it also had UK£656.0k in cash, and so its net debt is UK£3.82m.

How Strong Is FireAngel Safety Technology Group's Balance Sheet?

According to the last reported balance sheet, FireAngel Safety Technology Group had liabilities of UK£14.3m due within 12 months, and liabilities of UK£3.26m due beyond 12 months. Offsetting this, it had UK£656.0k in cash and UK£14.2m in receivables that were due within 12 months. So its liabilities total UK£2.68m more than the combination of its cash and short-term receivables.

Since publicly traded FireAngel Safety Technology Group shares are worth a total of UK£16.7m, it seems unlikely that this level of liabilities would be a major threat. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. 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 FireAngel Safety Technology Group 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 FireAngel Safety Technology Group wasn't profitable at an EBIT level, but managed to grow its revenue by 2.4%, to UK£47m. We usually like to see faster growth from unprofitable companies, but each to their own.

Caveat Emptor

Importantly, FireAngel Safety Technology Group had an earnings before interest and tax (EBIT) loss over the last year. Its EBIT loss was a whopping UK£4.1m. 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. So we think its balance sheet is a little strained, though not beyond repair. Another cause for caution is that is bled UK£5.7m in negative free cash flow over the last twelve months. So suffice it to say we consider the stock very risky. 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. For instance, we've identified 2 warning signs for FireAngel Safety Technology Group that you should be aware of.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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.