These 4 Measures Indicate That FD Technologies (LON:FDP) Is Using Debt Reasonably Well

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.' 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. We note that FD Technologies plc (LON:FDP) 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 common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. 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. 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 FD Technologies

What Is FD Technologies's Net Debt?

The image below, which you can click on for greater detail, shows that FD Technologies had debt of UK£36.5m at the end of February 2023, a reduction from UK£48.2m over a year. However, it does have UK£36.9m in cash offsetting this, leading to net cash of UK£406.0k.

A Look At FD Technologies' Liabilities

We can see from the most recent balance sheet that FD Technologies had liabilities of UK£136.9m falling due within a year, and liabilities of UK£36.5m due beyond that. Offsetting this, it had UK£36.9m in cash and UK£94.4m in receivables that were due within 12 months. So it has liabilities totalling UK£42.0m more than its cash and near-term receivables, combined.

Of course, FD Technologies has a market capitalization of UK£504.3m, so these liabilities are probably manageable. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. Despite its noteworthy liabilities, FD Technologies boasts net cash, so it's fair to say it does not have a heavy debt load!

FD Technologies grew its EBIT by 2.8% in the last year. Whilst that hardly knocks our socks off it is a positive when it comes to debt. 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 FD Technologies 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.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. FD Technologies may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. Over the last three years, FD Technologies actually produced more free cash flow than EBIT. That sort of strong cash conversion gets us as excited as the crowd when the beat drops at a Daft Punk concert.

Summing Up

We could understand if investors are concerned about FD Technologies's liabilities, but we can be reassured by the fact it has has net cash of UK£406.0k. The cherry on top was that in converted 116% of that EBIT to free cash flow, bringing in UK£620k. So we are not troubled with FD Technologies's debt use. Of course, we wouldn't say no to the extra confidence that we'd gain if we knew that FD Technologies insiders have been buying shares: if you're on the same wavelength, you can find out if insiders are buying by clicking this link.

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.

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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.