We Think Fuller Smith & Turner (LON:FSTA) Has A Fair Chunk Of Debt

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a 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 note that Fuller, Smith & Turner P.L.C. (LON:FSTA) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

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 common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for Fuller Smith & Turner

What Is Fuller Smith & Turner's Net Debt?

As you can see below, at the end of September 2020, Fuller Smith & Turner had UK£206.2m of debt, up from UK£68.6m a year ago. Click the image for more detail. However, because it has a cash reserve of UK£18.0m, its net debt is less, at about UK£188.2m.

How Strong Is Fuller Smith & Turner's Balance Sheet?

We can see from the most recent balance sheet that Fuller Smith & Turner had liabilities of UK£233.2m falling due within a year, and liabilities of UK£138.9m due beyond that. Offsetting this, it had UK£18.0m in cash and UK£15.3m in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by UK£338.8m.

This is a mountain of leverage relative to its market capitalization of UK£436.9m. This suggests shareholders would be heavily diluted if the company needed to shore up its balance sheet in a hurry. 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 Fuller Smith & Turner 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 Fuller Smith & Turner had a loss before interest and tax, and actually shrunk its revenue by 35%, to UK£210m. To be frank that doesn't bode well.

Caveat Emptor

While Fuller Smith & Turner's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. To be specific the EBIT loss came in at UK£15m. 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. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. Another cause for caution is that is bled UK£45m in negative free cash flow over the last twelve months. So in short it's a really risky stock. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. For instance, we've identified 1 warning sign for Fuller Smith & Turner that 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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