Is James Fisher and Sons (LON:FSJ) Using Debt In A Risky Way?

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

What Risk Does Debt Bring?

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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

Check out the opportunities and risks within the GB Infrastructure industry.

What Is James Fisher and Sons's Debt?

You can click the graphic below for the historical numbers, but it shows that James Fisher and Sons had UK£213.3m of debt in June 2022, down from UK£233.3m, one year before. However, because it has a cash reserve of UK£53.8m, its net debt is less, at about UK£159.5m.

How Healthy Is James Fisher and Sons' Balance Sheet?

Zooming in on the latest balance sheet data, we can see that James Fisher and Sons had liabilities of UK£212.2m due within 12 months and liabilities of UK£210.5m due beyond that. Offsetting these obligations, it had cash of UK£53.8m as well as receivables valued at UK£183.4m due within 12 months. So it has liabilities totalling UK£185.5m more than its cash and near-term receivables, combined.

Given this deficit is actually higher than the company's market capitalization of UK£133.9m, 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. In the scenario where the company had to clean up its balance sheet quickly, it seems likely shareholders would suffer extensive dilution. There's no doubt that we learn most about debt from the balance sheet. 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 want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

In the last year James Fisher and Sons's revenue was pretty flat, and it made a negative EBIT. While that's not too bad, we'd prefer see growth.

Caveat Emptor

Importantly, James Fisher and Sons had an earnings before interest and tax (EBIT) loss over the last year. Its EBIT loss was a whopping UK£27m. Considering that alongside the liabilities mentioned above make us nervous about the company. We'd want to see some strong near-term improvements before getting too interested in the stock. For example, we would not want to see a repeat of last year's loss of UK£39m. In the meantime, we consider the stock to be risky. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. Case in point: We've spotted 2 warning signs for James Fisher and Sons 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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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.