Is FireAngel Safety Technology Group (LON:FA.) Weighed On By Its Debt Load?

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. As with many other companies FireAngel Safety Technology Group plc (LON:FA.) makes use of debt. But should shareholders be worried about its use of debt?

When Is Debt Dangerous?

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. 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. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

See our latest analysis for FireAngel Safety Technology Group

What Is FireAngel Safety Technology Group's Net Debt?

As you can see below, FireAngel Safety Technology Group had UK£3.22m of debt at December 2021, down from UK£5.16m a year prior. But on the other hand it also has UK£3.29m in cash, leading to a UK£71.0k net cash position.

A Look At FireAngel Safety Technology Group's Liabilities

According to the last reported balance sheet, FireAngel Safety Technology Group had liabilities of UK£10.1m due within 12 months, and liabilities of UK£3.78m due beyond 12 months. Offsetting these obligations, it had cash of UK£3.29m as well as receivables valued at UK£9.89m due within 12 months. So it has liabilities totalling UK£671.0k more than its cash and near-term receivables, combined.

Given FireAngel Safety Technology Group has a market capitalization of UK£24.9m, it's hard to believe these liabilities pose much threat. 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.

Over 12 months, FireAngel Safety Technology Group reported revenue of UK£43m, which is a gain of 8.9%, although it did not report any earnings before interest and tax. 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?

We have no doubt that loss making companies are, in general, riskier than profitable ones. And in the last year FireAngel Safety Technology Group had an earnings before interest and tax (EBIT) loss, truth be told. Indeed, in that time it burnt through UK£4.7m of cash and made a loss of UK£3.3m. Given it only has net cash of UK£71.0k, the company may need to raise more capital if it doesn't reach break-even soon. Summing up, we're a little skeptical of this one, as it seems fairly risky in the absence of free cashflow. 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. For instance, we've identified 4 warning signs for FireAngel Safety Technology Group (1 is potentially serious) you should be aware of.

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.

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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.