We Think Future Consumer (NSE:FCONSUMER) Has A Fair Chunk Of 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.' 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 Future Consumer Limited (NSE:FCONSUMER) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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, plenty of companies use debt to fund growth, without any negative consequences. 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?

As you can see below, Future Consumer had ₹5.36b of debt at September 2020, down from ₹6.98b a year prior. However, because it has a cash reserve of ₹1.13b, its net debt is less, at about ₹4.24b.

How Healthy Is Future Consumer's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Future Consumer had liabilities of ₹8.12b due within 12 months and liabilities of ₹3.29b due beyond that. Offsetting these obligations, it had cash of ₹1.13b as well as receivables valued at ₹7.14b due within 12 months. So its liabilities total ₹3.14b more than the combination of its cash and short-term receivables.

Of course, Future Consumer has a market capitalization of ₹16.4b, so these liabilities are probably manageable. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. 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.

In the last year Future Consumer had a loss before interest and tax, and actually shrunk its revenue by 41%, to ₹25b. 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. To be specific the EBIT loss came in at ₹1.6b. 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. We would feel better if it turned its trailing twelve month loss of ₹4.0b into a profit. So in short it's a really risky stock. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. For instance, we've identified 4 warning signs for Future Consumer (1 is significant) you should be aware of.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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This article by Simply Wall St is general in nature. 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.
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