Is First Advantage (NASDAQ:FA) Using Too Much Debt?

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.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. Importantly, First Advantage Corporation (NASDAQ:FA) does carry debt. But should shareholders be worried about its use of debt?

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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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. When we think about a company's use of debt, we first look at cash and debt together.

What Is First Advantage's Debt?

You can click the graphic below for the historical numbers, but it shows that as of March 2025 First Advantage had US$2.14b of debt, an increase on US$558.9m, over one year. However, it also had US$172.1m in cash, and so its net debt is US$1.97b.

How Healthy Is First Advantage's Balance Sheet?

According to the last reported balance sheet, First Advantage had liabilities of US$241.0m due within 12 months, and liabilities of US$2.35b due beyond 12 months. Offsetting this, it had US$172.1m in cash and US$270.0m in receivables that were due within 12 months. So its liabilities total US$2.15b more than the combination of its cash and short-term receivables.

This deficit is considerable relative to its market capitalization of US$2.98b, so it does suggest shareholders should keep an eye on First Advantage's use of debt. Should its lenders demand that it shore up the balance sheet, shareholders would likely face severe dilution. 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 First Advantage can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

View our latest analysis for First Advantage

In the last year First Advantage wasn't profitable at an EBIT level, but managed to grow its revenue by 38%, to US$1.0b. With any luck the company will be able to grow its way to profitability.

Caveat Emptor

While we can certainly appreciate First Advantage's revenue growth, its earnings before interest and tax (EBIT) loss is not ideal. Indeed, it lost US$54m at the EBIT level. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. However, it doesn't help that it burned through US$28m of cash over the last year. So suffice it to say we do consider the stock to be risky. 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. To that end, you should learn about the 2 warning signs we've spotted with First Advantage (including 1 which is potentially serious) .

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.