David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the 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 James Fisher and Sons plc (LON:FSJ) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.
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 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, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, together.
What Is James Fisher and Sons's Debt?
The image below, which you can click on for greater detail, shows that James Fisher and Sons had debt of UK£207.6m at the end of December 2021, a reduction from UK£258.7m over a year. However, it also had UK£68.0m in cash, and so its net debt is UK£139.6m.
How Strong Is James Fisher and Sons' Balance Sheet?
According to the last reported balance sheet, James Fisher and Sons had liabilities of UK£199.5m due within 12 months, and liabilities of UK£214.8m due beyond 12 months. On the other hand, it had cash of UK£68.0m and UK£147.5m worth of receivables due within a year. So its liabilities total UK£198.8m more than the combination of its cash and short-term receivables.
Given this deficit is actually higher than the company's market capitalization of UK£189.5m, we think shareholders really should watch James Fisher and Sons's debt levels, like a parent watching their child ride a bike for the first time. Hypothetically, extremely heavy dilution would be required if the company were forced to pay down its liabilities by raising capital at the current share price. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine James Fisher and Sons'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.
In the last year James Fisher and Sons had a loss before interest and tax, and actually shrunk its revenue by 4.7%, to UK£494m. We would much prefer see growth.
Over the last twelve months James Fisher and Sons produced an earnings before interest and tax (EBIT) loss. Indeed, it lost a very considerable UK£23m at the EBIT level. When we look at that alongside the significant liabilities, we're not particularly confident about the company. It would need to improve its operations quickly for us to be interested in it. For example, we would not want to see a repeat of last year's loss of UK£28m. In the meantime, we consider the stock to be risky. 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 example - James Fisher and Sons has 2 warning signs we think you should be aware of.
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.