Health Check: How Prudently Does Future Lifestyle Fashions (NSE:FLFL) Use Debt?

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.' 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. As with many other companies Future Lifestyle Fashions Limited (NSE:FLFL) makes use of debt. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

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. 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. 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 Lifestyle Fashions

What Is Future Lifestyle Fashions's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of September 2020 Future Lifestyle Fashions had ₹11.9b of debt, an increase on ₹9.13b, over one year. However, because it has a cash reserve of ₹792.3m, its net debt is less, at about ₹11.1b.

How Strong Is Future Lifestyle Fashions's Balance Sheet?

The latest balance sheet data shows that Future Lifestyle Fashions had liabilities of ₹45.5b due within a year, and liabilities of ₹12.3b falling due after that. On the other hand, it had cash of ₹792.3m and ₹7.01b worth of receivables due within a year. So its liabilities total ₹50.0b more than the combination of its cash and short-term receivables.

This deficit casts a shadow over the ₹16.6b 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. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Future Lifestyle Fashions'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.

Over 12 months, Future Lifestyle Fashions made a loss at the EBIT level, and saw its revenue drop to ₹37b, which is a fall of 41%. That makes us nervous, to say the least.

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 ₹3.6b at the EBIT level. Combining this information with the significant liabilities we already touched on makes us very hesitant about this stock, to say the least. That said, it is possible that the company will turn its fortunes around. But we think that is unlikely since it is low on liquid assets, and made a loss of ₹7.0b in the last year. So we think this stock is quite risky. We'd prefer to pass. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. Be aware that Future Lifestyle Fashions is showing 3 warning signs in our investment analysis , and 1 of those shouldn't be ignored...

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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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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