Is Flexible Solutions International (NYSEMKT:FSI) 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. We can see that Flexible Solutions International Inc. (NYSEMKT:FSI) does use debt in its business. But should shareholders be worried about its use of debt?

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 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, 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 Flexible Solutions International

How Much Debt Does Flexible Solutions International Carry?

As you can see below, Flexible Solutions International had US$5.20m of debt at September 2020, down from US$6.88m a year prior. But it also has US$6.24m in cash to offset that, meaning it has US$1.04m net cash.

How Strong Is Flexible Solutions International's Balance Sheet?

We can see from the most recent balance sheet that Flexible Solutions International had liabilities of US$6.69m falling due within a year, and liabilities of US$3.86m due beyond that. Offsetting these obligations, it had cash of US$6.24m as well as receivables valued at US$5.79m due within 12 months. So it can boast US$1.48m more liquid assets than total liabilities.

This short term liquidity is a sign that Flexible Solutions International could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, Flexible Solutions International boasts net cash, so it's fair to say it does not have a heavy debt load!

On top of that, Flexible Solutions International grew its EBIT by 66% over the last twelve months, and that growth will make it easier to handle its debt. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if Flexible Solutions International 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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. While Flexible Solutions International has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. Looking at the most recent three years, Flexible Solutions International recorded free cash flow of 41% of its EBIT, which is weaker than we'd expect. That's not great, when it comes to paying down debt.

Summing up

While it is always sensible to investigate a company's debt, in this case Flexible Solutions International has US$1.04m in net cash and a decent-looking balance sheet. And it impressed us with its EBIT growth of 66% over the last year. So we don't think Flexible Solutions International's use of debt is risky. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. Take risks, for example - Flexible Solutions International has 1 warning sign we think you should be aware of.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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