Is Future Lifestyle Fashions (NSE:FLFL) Using Debt Sensibly?

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' 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 Lifestyle Fashions Limited (NSE:FLFL) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. If things get really bad, the lenders can take control of the business. 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, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for Future Lifestyle Fashions

How Much Debt Does Future Lifestyle Fashions Carry?

As you can see below, at the end of September 2021, Future Lifestyle Fashions had ₹14.7b of debt, up from ₹11.9b a year ago. Click the image for more detail. However, it also had ₹714.3m in cash, and so its net debt is ₹14.0b.

How Healthy Is Future Lifestyle Fashions' Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Future Lifestyle Fashions had liabilities of ₹38.6b due within 12 months and liabilities of ₹17.0b due beyond that. On the other hand, it had cash of ₹714.3m and ₹6.52b worth of receivables due within a year. So it has liabilities totalling ₹48.3b more than its cash and near-term receivables, combined.

The deficiency here weighs heavily on the ₹12.1b company itself, as if a child were struggling under the weight of an enormous back-pack full of books, his sports gear, and a trumpet. 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 you can't view debt in total isolation; since Future Lifestyle Fashions 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 Lifestyle Fashions made a loss at the EBIT level, and saw its revenue drop to ₹29b, which is a fall of 21%. 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 ₹5.0b 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. Nevertheless, we would not bet on it given that it lost ₹8.8b in just last twelve months, and it doesn't have much by way of liquid assets. 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. However, not all investment risk resides within the balance sheet - far from it. For example - Future Lifestyle Fashions has 1 warning sign we think you should be aware of.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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.