TechnipFMC (NYSE:FTI) Has A Pretty 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. We note that TechnipFMC plc (NYSE:FTI) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

View our latest analysis for TechnipFMC

What Is TechnipFMC's Debt?

The image below, which you can click on for greater detail, shows that TechnipFMC had debt of US$2.26b at the end of September 2021, a reduction from US$3.86b over a year. On the flip side, it has US$1.56b in cash leading to net debt of about US$693.2m.

A Look At TechnipFMC's Liabilities

We can see from the most recent balance sheet that TechnipFMC had liabilities of US$3.69b falling due within a year, and liabilities of US$3.04b due beyond that. On the other hand, it had cash of US$1.56b and US$2.63b worth of receivables due within a year. So its liabilities total US$2.54b more than the combination of its cash and short-term receivables.

This deficit is considerable relative to its market capitalization of US$2.87b, so it does suggest shareholders should keep an eye on TechnipFMC's use of debt. Should its lenders demand that it shore up the balance sheet, shareholders would likely face severe dilution.

In order to size up a company's debt relative to its earnings, we calculate its net debt divided by its earnings before interest, tax, depreciation, and amortization (EBITDA) and its earnings before interest and tax (EBIT) divided by its interest expense (its interest cover). This way, we consider both the absolute quantum of the debt, as well as the interest rates paid on it.

Given net debt is only 0.56 times EBITDA, it is initially surprising to see that TechnipFMC's EBIT has low interest coverage of 2.5 times. So one way or the other, it's clear the debt levels are not trivial. Notably, TechnipFMC's EBIT launched higher than Elon Musk, gaining a whopping 194% on last year. 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 TechnipFMC's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. So the logical step is to look at the proportion of that EBIT that is matched by actual free cash flow. Looking at the most recent three years, TechnipFMC recorded free cash flow of 48% of its EBIT, which is weaker than we'd expect. That's not great, when it comes to paying down debt.

Our View

On our analysis TechnipFMC's EBIT growth rate should signal that it won't have too much trouble with its debt. But the other factors we noted above weren't so encouraging. To be specific, it seems about as good at covering its interest expense with its EBIT as wet socks are at keeping your feet warm. Looking at all this data makes us feel a little cautious about TechnipFMC's debt levels. While debt does have its upside in higher potential returns, we think shareholders should definitely consider how debt levels might make the stock more 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. Case in point: We've spotted 3 warning signs for TechnipFMC you should be aware of.

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.