Does Franklin Covey (NYSE:FC) Have A Healthy Balance Sheet?

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' 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. Importantly, Franklin Covey Co. (NYSE:FC) does carry debt. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for Franklin Covey

What Is Franklin Covey's Debt?

The image below, which you can click on for greater detail, shows that Franklin Covey had debt of US$17.6m at the end of November 2021, a reduction from US$18.8m over a year. However, its balance sheet shows it holds US$51.3m in cash, so it actually has US$33.7m net cash.

A Look At Franklin Covey's Liabilities

We can see from the most recent balance sheet that Franklin Covey had liabilities of US$118.2m falling due within a year, and liabilities of US$30.5m due beyond that. On the other hand, it had cash of US$51.3m and US$51.7m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by US$45.7m.

Of course, Franklin Covey has a market capitalization of US$704.8m, so these liabilities are probably manageable. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. While it does have liabilities worth noting, Franklin Covey also has more cash than debt, so we're pretty confident it can manage its debt safely.

Even more impressive was the fact that Franklin Covey grew its EBIT by 210% over twelve months. That boost will make it even easier to pay down debt going forward. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine Franklin Covey'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.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. Franklin Covey may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. Over the last three years, Franklin Covey actually produced more free cash flow than EBIT. There's nothing better than incoming cash when it comes to staying in your lenders' good graces.

Summing up

We could understand if investors are concerned about Franklin Covey's liabilities, but we can be reassured by the fact it has has net cash of US$33.7m. And it impressed us with free cash flow of US$44m, being 406% of its EBIT. So we don't think Franklin Covey's use of debt is risky. Above most other metrics, we think its important to track how fast earnings per share is growing, if at all. If you've also come to that realization, you're in luck, because today you can view this interactive graph of Franklin Covey's earnings per share history for free.

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.