Does Future Consumer (NSE:FCONSUMER) Have A Healthy Balance Sheet?

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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. We can see that Future Consumer Limited (NSE:FCONSUMER) does use debt in its business. But should shareholders be worried about its use of debt?

When Is Debt Dangerous?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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 our latest analysis for Future Consumer

What Is Future Consumer's Debt?

As you can see below, Future Consumer had ₹5.36b of debt at September 2020, down from ₹6.98b a year prior. On the flip side, it has ₹1.13b in cash leading to net debt of about ₹4.24b.

A Look At Future Consumer's Liabilities

The latest balance sheet data shows that Future Consumer had liabilities of ₹8.12b due within a year, and liabilities of ₹3.29b falling due after that. On the other hand, it had cash of ₹1.13b and ₹7.14b worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by ₹3.14b.

Future Consumer has a market capitalization of ₹15.4b, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. But it's clear that we should definitely closely examine whether it can manage its debt without dilution. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Future Consumer'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.

In the last year Future Consumer had a loss before interest and tax, and actually shrunk its revenue by 58%, to ₹17b. That makes us nervous, to say the least.

Caveat Emptor

While Future Consumer's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. Its EBIT loss was a whopping ₹2.2b. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. For example, we would not want to see a repeat of last year's loss of ₹5.0b. So in short it's a really risky stock. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. For instance, we've identified 2 warning signs for Future Consumer (1 can't be ignored) 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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