We Think FireAngel Safety Technology Group (LON:FA.) Has A Fair Chunk Of 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.' 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 FireAngel Safety Technology Group plc (LON:FA.) does use debt in its business. But is this debt a concern to shareholders?

Why Does Debt Bring Risk?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for FireAngel Safety Technology Group

How Much Debt Does FireAngel Safety Technology Group Carry?

The image below, which you can click on for greater detail, shows that FireAngel Safety Technology Group had debt of UK£5.16m at the end of December 2020, a reduction from UK£6.99m over a year. However, it does have UK£1.47m in cash offsetting this, leading to net debt of about UK£3.70m.

A Look At FireAngel Safety Technology Group's Liabilities

The latest balance sheet data shows that FireAngel Safety Technology Group had liabilities of UK£20.6m due within a year, and liabilities of UK£2.22m falling due after that. Offsetting these obligations, it had cash of UK£1.47m as well as receivables valued at UK£10.8m due within 12 months. So it has liabilities totalling UK£10.6m more than its cash and near-term receivables, combined.

This deficit isn't so bad because FireAngel Safety Technology Group is worth UK£25.6m, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. However, it is still worthwhile taking a close look at its ability to pay off debt. There's no doubt that we learn most about debt from the balance sheet. But it is FireAngel Safety Technology Group's earnings that will influence how the balance sheet holds up in the future. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

In the last year FireAngel Safety Technology Group had a loss before interest and tax, and actually shrunk its revenue by 12%, to UK£40m. That's not what we would hope to see.

Caveat Emptor

Not only did FireAngel Safety Technology Group's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). Indeed, it lost a very considerable UK£9.1m at the EBIT level. 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. However, it doesn't help that it burned through UK£3.6m of cash over the last year. So in short it's a really risky stock. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. For instance, we've identified 4 warning signs for FireAngel Safety Technology Group (2 don't sit too well with us) you should be aware of.

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.

When trading FireAngel Safety Technology Group or any other investment, use the platform considered by many to be the Professional's Gateway to the Worlds Market, Interactive Brokers. You get the lowest-cost* trading on stocks, options, futures, forex, bonds and funds worldwide from a single integrated account. Promoted

This article by Simply Wall St is general in nature. 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.
^*Interactive Brokers Rated Lowest Cost Broker by StockBrokers.com Annual Online Review 2020

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