Is Future Consumer (NSE:FCONSUMER) Using Too Much Debt?

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.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. As with many other companies Future Consumer Limited (NSE:FCONSUMER) makes use of debt. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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 think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for Future Consumer

How Much Debt Does Future Consumer Carry?

You can click the graphic below for the historical numbers, but it shows that Future Consumer had ₹4.91b of debt in March 2021, down from ₹6.11b, one year before. However, because it has a cash reserve of ₹623.8m, its net debt is less, at about ₹4.29b.

How Strong Is Future Consumer's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Future Consumer had liabilities of ₹9.32b due within 12 months and liabilities of ₹2.90b due beyond that. Offsetting these obligations, it had cash of ₹623.8m as well as receivables valued at ₹6.33b due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by ₹5.26b.

While this might seem like a lot, it is not so bad since Future Consumer has a market capitalization of ₹15.7b, and so it could probably strengthen its balance sheet by raising capital if it needed to. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Future Consumer will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Over 12 months, Future Consumer made a loss at the EBIT level, and saw its revenue drop to ₹12b, which is a fall of 71%. To be frank that doesn't bode well.

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. Indeed, it lost a very considerable ₹3.4b at the EBIT level. 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 ₹4.8b. 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 example Future Consumer has 3 warning signs (and 1 which is a bit concerning) we think you should know about.

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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