Is FireAngel Safety Technology Group (LON:FA.) Using Too Much Debt?

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that '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 note that FireAngel Safety Technology Group plc (LON:FA.) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for FireAngel Safety Technology Group

What Is FireAngel Safety Technology Group's Debt?

The image below, which you can click on for greater detail, shows that at June 2021 FireAngel Safety Technology Group had debt of UK£3.63m, up from UK£2.54m in one year. But it also has UK£5.84m in cash to offset that, meaning it has UK£2.21m net cash.

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

We can see from the most recent balance sheet that FireAngel Safety Technology Group had liabilities of UK£12.5m falling due within a year, and liabilities of UK£4.66m due beyond that. On the other hand, it had cash of UK£5.84m and UK£10.5m worth of receivables due within a year. So it has liabilities totalling UK£856.0k more than its cash and near-term receivables, combined.

Of course, FireAngel Safety Technology Group has a market capitalization of UK£24.4m, so these liabilities are probably manageable. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. Despite its noteworthy liabilities, FireAngel Safety Technology Group boasts net cash, so it's fair to say it does not have a heavy debt load! When analysing debt levels, the balance sheet is the obvious place to start. 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 11%, to UK£46m. That rate of growth is a bit slow for our taste, but it takes all types to make a world.

So How Risky Is FireAngel Safety Technology Group?

Statistically speaking companies that lose money are riskier than those that make money. And in the last year FireAngel Safety Technology Group had an earnings before interest and tax (EBIT) loss, truth be told. And over the same period it saw negative free cash outflow of UK£4.7m and booked a UK£7.5m accounting loss. With only UK£2.21m on the balance sheet, it would appear that its going to need to raise capital again soon. Overall, we'd say the stock is a bit risky, and we're usually very cautious until we see positive free cash flow. 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. These risks can be hard to spot. Every company has them, and we've spotted 3 warning signs for FireAngel Safety Technology Group you should know about.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.