Health Check: How Prudently Does James Fisher and Sons (LON:FSJ) Use Debt?

By
Simply Wall St
Published
October 31, 2021
LSE:FSJ
Source: Shutterstock

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.' 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. Importantly, James Fisher and Sons plc (LON:FSJ) does carry debt. But the real question is whether this debt is making the company risky.

When Is Debt A Problem?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. 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 James Fisher and Sons

How Much Debt Does James Fisher and Sons Carry?

As you can see below, at the end of June 2021, James Fisher and Sons had UK£233.3m of debt, up from UK£191.1m a year ago. Click the image for more detail. However, it also had UK£63.0m in cash, and so its net debt is UK£170.3m.

debt-equity-history-analysis
LSE:FSJ Debt to Equity History November 1st 2021

How Healthy Is James Fisher and Sons' Balance Sheet?

The latest balance sheet data shows that James Fisher and Sons had liabilities of UK£209.5m due within a year, and liabilities of UK£225.7m falling due after that. Offsetting these obligations, it had cash of UK£63.0m as well as receivables valued at UK£183.6m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by UK£188.6m.

This deficit is considerable relative to its market capitalization of UK£206.6m, so it does suggest shareholders should keep an eye on James Fisher and Sons' use of debt. Should its lenders demand that it shore up the balance sheet, shareholders would likely face severe dilution. 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 James Fisher and Sons can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

In the last year James Fisher and Sons had a loss before interest and tax, and actually shrunk its revenue by 16%, to UK£494m. We would much prefer see growth.

Caveat Emptor

Not only did James Fisher and Sons's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). Its EBIT loss was a whopping UK£45m. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. So we think its balance sheet is a little strained, though not beyond repair. For example, we would not want to see a repeat of last year's loss of UK£49m. So in short it's a really risky stock. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. For instance, we've identified 2 warning signs for James Fisher and Sons (1 is a bit concerning) 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.

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