Flux Power Holdings (NASDAQ:FLUX) Is Making Moderate Use Of Debt

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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, Flux Power Holdings, Inc. (NASDAQ:FLUX) does carry debt. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

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. 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 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 Flux Power Holdings

What Is Flux Power Holdings's Debt?

The image below, which you can click on for greater detail, shows that at June 2023 Flux Power Holdings had debt of US$9.91m, up from US$4.89m in one year. On the flip side, it has US$2.38m in cash leading to net debt of about US$7.53m.

A Look At Flux Power Holdings' Liabilities

Zooming in on the latest balance sheet data, we can see that Flux Power Holdings had liabilities of US$23.8m due within 12 months and liabilities of US$2.33m due beyond that. Offsetting these obligations, it had cash of US$2.38m as well as receivables valued at US$8.65m due within 12 months. So its liabilities total US$15.1m more than the combination of its cash and short-term receivables.

Flux Power Holdings has a market capitalization of US$56.7m, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. But it's clear that we should definitely closely examine whether it can manage its debt without dilution. The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine Flux Power Holdings's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

In the last year Flux Power Holdings wasn't profitable at an EBIT level, but managed to grow its revenue by 57%, to US$66m. Shareholders probably have their fingers crossed that it can grow its way to profits.

Caveat Emptor

Even though Flux Power Holdings managed to grow its top line quite deftly, the cold hard truth is that it is losing money on the EBIT line. To be specific the EBIT loss came in at US$5.4m. 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. Another cause for caution is that is bled US$4.6m in negative free cash flow over the last twelve months. So suffice it to say we consider the stock very risky. 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. Be aware that Flux Power Holdings is showing 4 warning signs in our investment analysis , you should know about...

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.