Does Friedman Industries (NYSEMKT:FRD) 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.' 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, Friedman Industries, Incorporated (NYSEMKT:FRD) does carry debt. But the real question is whether this debt is making the company risky.

What Risk Does Debt Bring?

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. 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 step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for Friedman Industries

How Much Debt Does Friedman Industries Carry?

You can click the graphic below for the historical numbers, but it shows that as of September 2020 Friedman Industries had US$1.69m of debt, an increase on none, over one year. But on the other hand it also has US$18.8m in cash, leading to a US$17.1m net cash position.

How Healthy Is Friedman Industries's Balance Sheet?

The latest balance sheet data shows that Friedman Industries had liabilities of US$6.50m due within a year, and liabilities of US$1.27m falling due after that. Offsetting these obligations, it had cash of US$18.8m as well as receivables valued at US$11.3m due within 12 months. So it can boast US$22.3m more liquid assets than total liabilities.

This surplus liquidity suggests that Friedman Industries's balance sheet could take a hit just as well as Homer Simpson's head can take a punch. Having regard to this fact, we think its balance sheet is just as strong as misogynists are weak. Succinctly put, Friedman Industries boasts net cash, so it's fair to say it does not have a heavy debt load! The balance sheet is clearly the area to focus on when you are analysing debt. But it is Friedman Industries's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

In the last year Friedman Industries had a loss before interest and tax, and actually shrunk its revenue by 34%, to US$110m. To be frank that doesn't bode well.

So How Risky Is Friedman Industries?

By their very nature companies that are losing money are more risky than those with a long history of profitability. And we do note that Friedman Industries had an earnings before interest and tax (EBIT) loss, over the last year. Indeed, in that time it burnt through US$1.2m of cash and made a loss of US$5.0m. With only US$17.1m on the balance sheet, it would appear that its going to need to raise capital again soon. Overall, its balance sheet doesn't seem overly risky, at the moment, but we're always cautious until we see the positive free cash flow. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. For example, we've discovered 2 warning signs for Friedman Industries (1 can't be ignored!) that you should be aware of before investing here.

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. 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.
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