Does Fabryki Mebli FORTE (WSE:FTE) Have A Healthy Balance Sheet?

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.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. As with many other companies Fabryki Mebli FORTE S.A. (WSE:FTE) makes use of debt. But is this debt a concern to shareholders?

Why Does Debt Bring Risk?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. 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. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

See our latest analysis for Fabryki Mebli FORTE

What Is Fabryki Mebli FORTE's Net Debt?

The image below, which you can click on for greater detail, shows that Fabryki Mebli FORTE had debt of zł297.6m at the end of June 2024, a reduction from zł381.9m over a year. On the flip side, it has zł19.3m in cash leading to net debt of about zł278.3m.

How Healthy Is Fabryki Mebli FORTE's Balance Sheet?

We can see from the most recent balance sheet that Fabryki Mebli FORTE had liabilities of zł451.7m falling due within a year, and liabilities of zł62.2m due beyond that. Offsetting this, it had zł19.3m in cash and zł173.3m in receivables that were due within 12 months. So its liabilities total zł321.2m more than the combination of its cash and short-term receivables.

While this might seem like a lot, it is not so bad since Fabryki Mebli FORTE has a market capitalization of zł552.8m, and so it could probably strengthen its balance sheet by raising capital if it needed to. But it's clear that we should definitely closely examine whether it can manage its debt without dilution. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Fabryki Mebli FORTE can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

In the last year Fabryki Mebli FORTE had a loss before interest and tax, and actually shrunk its revenue by 16%, to zł1.0b. That's not what we would hope to see.

Caveat Emptor

While Fabryki Mebli FORTE'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 zł14m. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. For example, we would not want to see a repeat of last year's loss of zł73m. So in short it's a really risky stock. For riskier companies like Fabryki Mebli FORTE I always like to keep an eye on the long term profit and revenue trends. Fortunately, you can click to see our interactive graph of its profit, revenue, and operating cashflow.

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. 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.