Future Lifestyle Fashions (NSE:FLFL) Has Debt But No Earnings; Should You Worry?

Warren Buffett famously said, '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, Future Lifestyle Fashions Limited (NSE:FLFL) does carry debt. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

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. 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. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for Future Lifestyle Fashions

What Is Future Lifestyle Fashions's Debt?

You can click the graphic below for the historical numbers, but it shows that Future Lifestyle Fashions had ₹12.6b of debt in March 2021, down from ₹13.8b, one year before. However, because it has a cash reserve of ₹879.7m, its net debt is less, at about ₹11.7b.

How Strong Is Future Lifestyle Fashions' Balance Sheet?

The latest balance sheet data shows that Future Lifestyle Fashions had liabilities of ₹35.6b due within a year, and liabilities of ₹19.7b falling due after that. Offsetting this, it had ₹879.7m in cash and ₹6.83b in receivables that were due within 12 months. So its liabilities total ₹47.5b more than the combination of its cash and short-term receivables.

This deficit casts a shadow over the ₹12.2b company, like a colossus towering over mere mortals. So we definitely think shareholders need to watch this one closely. At the end of the day, Future Lifestyle Fashions would probably need a major re-capitalization if its creditors were to demand repayment. There's no doubt that we learn most about debt from the balance sheet. But it is Future Lifestyle Fashions's earnings that will influence how the balance sheet holds up in the future. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

Over 12 months, Future Lifestyle Fashions made a loss at the EBIT level, and saw its revenue drop to ₹23b, which is a fall of 64%. To be frank that doesn't bode well.

Caveat Emptor

Not only did Future Lifestyle Fashions's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). Indeed, it lost a very considerable ₹6.2b at the EBIT level. If you consider the significant liabilities mentioned above, we are extremely wary of this investment. Of course, it may be able to improve its situation with a bit of luck and good execution. But we think that is unlikely since it is low on liquid assets, and made a loss of ₹9.3b in the last year. So while it's not wise to assume the company will fail, we do think it's risky. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. For example, we've discovered 2 warning signs for Future Lifestyle Fashions (1 can't be ignored!) that you should be aware of before investing here.

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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