Is FirstGroup (LON:FGP) Using Too Much Debt?

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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 FirstGroup plc (LON:FGP) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

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When Is Debt A Problem?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. 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, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. When we think about a company's use of debt, we first look at cash and debt together.

How Much Debt Does FirstGroup Carry?

The image below, which you can click on for greater detail, shows that FirstGroup had debt of UK£162.7m at the end of September 2024, a reduction from UK£301.5m over a year. But it also has UK£436.8m in cash to offset that, meaning it has UK£274.1m net cash.

A Look At FirstGroup's Liabilities

We can see from the most recent balance sheet that FirstGroup had liabilities of UK£1.87b falling due within a year, and liabilities of UK£964.4m due beyond that. On the other hand, it had cash of UK£436.8m and UK£789.9m worth of receivables due within a year. So it has liabilities totalling UK£1.61b more than its cash and near-term receivables, combined.

The deficiency here weighs heavily on the UK£1.01b company itself, as if a child were struggling under the weight of an enormous back-pack full of books, his sports gear, and a trumpet. So we'd watch its balance sheet closely, without a doubt. At the end of the day, FirstGroup would probably need a major re-capitalization if its creditors were to demand repayment. FirstGroup boasts net cash, so it's fair to say it does not have a heavy debt load, even if it does have very significant liabilities, in total.

View our latest analysis for FirstGroup

Notably, FirstGroup's EBIT launched higher than Elon Musk, gaining a whopping 105% on last year. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine FirstGroup's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. FirstGroup 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. Happily for any shareholders, FirstGroup actually produced more free cash flow than EBIT over the last three years. There's nothing better than incoming cash when it comes to staying in your lenders' good graces.

Summing Up

While FirstGroup does have more liabilities than liquid assets, it also has net cash of UK£274.1m. And it impressed us with free cash flow of UK£470m, being 311% of its EBIT. So we don't have any problem with FirstGroup's use of debt. Of course, we wouldn't say no to the extra confidence that we'd gain if we knew that FirstGroup insiders have been buying shares: if you're on the same wavelength, you can find out if insiders are buying by clicking this link.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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.