Does Focus Lighting and Fixtures (NSE:FOCUS) Have A Healthy Balance Sheet?

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. Importantly, Focus Lighting and Fixtures Limited (NSE:FOCUS) does carry debt. But is this debt a concern to shareholders?

When Is Debt Dangerous?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. If things get really bad, the lenders can take control of the business. 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. 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.

See our latest analysis for Focus Lighting and Fixtures

How Much Debt Does Focus Lighting and Fixtures Carry?

The image below, which you can click on for greater detail, shows that at September 2024 Focus Lighting and Fixtures had debt of ₹147.7m, up from ₹47.3m in one year. On the flip side, it has ₹52.2m in cash leading to net debt of about ₹95.5m.

How Healthy Is Focus Lighting and Fixtures' Balance Sheet?

According to the last reported balance sheet, Focus Lighting and Fixtures had liabilities of ₹620.9m due within 12 months, and liabilities of ₹147.5m due beyond 12 months. On the other hand, it had cash of ₹52.2m and ₹1.03b worth of receivables due within a year. So it actually has ₹317.9m more liquid assets than total liabilities.

This short term liquidity is a sign that Focus Lighting and Fixtures could probably pay off its debt with ease, as its balance sheet is far from stretched.

In order to size up a company's debt relative to its earnings, we calculate its net debt divided by its earnings before interest, tax, depreciation, and amortization (EBITDA) and its earnings before interest and tax (EBIT) divided by its interest expense (its interest cover). This way, we consider both the absolute quantum of the debt, as well as the interest rates paid on it.

Focus Lighting and Fixtures has a low net debt to EBITDA ratio of only 0.28. And its EBIT easily covers its interest expense, being 279 times the size. So you could argue it is no more threatened by its debt than an elephant is by a mouse. But the bad news is that Focus Lighting and Fixtures has seen its EBIT plunge 20% in the last twelve months. If that rate of decline in earnings continues, the company could find itself in a tight spot. There's no doubt that we learn most about debt from the balance sheet. But it is Focus Lighting and Fixtures's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. So the logical step is to look at the proportion of that EBIT that is matched by actual free cash flow. During the last three years, Focus Lighting and Fixtures burned a lot of cash. While that may be a result of expenditure for growth, it does make the debt far more risky.

Our View

While Focus Lighting and Fixtures's conversion of EBIT to free cash flow has us nervous. To wit both its interest cover and net debt to EBITDA were encouraging signs. Looking at all the angles mentioned above, it does seem to us that Focus Lighting and Fixtures is a somewhat risky investment as a result of its debt. That's not necessarily a bad thing, since leverage can boost returns on equity, but it is something to be aware of. 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 - Focus Lighting and Fixtures has 3 warning signs we think you should be aware of.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.