Health Check: How Prudently Does L.B. Foster (NASDAQ:FSTR) Use 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. We note that L.B. Foster Company (NASDAQ:FSTR) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. 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.

Check out our latest analysis for L.B. Foster

What Is L.B. Foster's Net Debt?

As you can see below, at the end of September 2022, L.B. Foster had US$98.8m of debt, up from US$32.7m a year ago. Click the image for more detail. However, it does have US$6.90m in cash offsetting this, leading to net debt of about US$91.9m.

A Look At L.B. Foster's Liabilities

We can see from the most recent balance sheet that L.B. Foster had liabilities of US$105.1m falling due within a year, and liabilities of US$132.4m due beyond that. On the other hand, it had cash of US$6.90m and US$112.6m worth of receivables due within a year. So its liabilities total US$118.0m more than the combination of its cash and short-term receivables.

This is a mountain of leverage relative to its market capitalization of US$127.2m. This suggests shareholders would be heavily diluted if the company needed to shore up its balance sheet in a hurry. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if L.B. Foster 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 L.B. Foster had a loss before interest and tax, and actually shrunk its revenue by 8.3%, to US$473m. That's not what we would hope to see.

Caveat Emptor

Importantly, L.B. Foster had an earnings before interest and tax (EBIT) loss over the last year. Indeed, it lost US$626k at the EBIT level. 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. So we think its balance sheet is a little strained, though not beyond repair. Another cause for caution is that is bled US$18m in negative free cash flow over the last twelve months. So suffice it to say we consider the stock very risky. For riskier companies like L.B. Foster I always like to keep an eye on whether insiders are buying or selling. So click here if you want to find out for yourself.

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. 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.