Formula One Group (NASDAQ:FWON.K) Is Carrying A Fair Bit Of Debt

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a 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, Formula One Group (NASDAQ:FWON.K) does carry debt. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for Formula One Group

What Is Formula One Group's Net Debt?

As you can see below, Formula One Group had US$3.67b of debt at June 2020, down from US$5.26b a year prior. However, it does have US$1.77b in cash offsetting this, leading to net debt of about US$1.91b.

How Healthy Is Formula One Group's Balance Sheet?

The latest balance sheet data shows that Formula One Group had liabilities of US$912.0m due within a year, and liabilities of US$4.06b falling due after that. Offsetting these obligations, it had cash of US$1.77b as well as receivables valued at US$147.0m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by US$3.05b.

This deficit isn't so bad because Formula One Group is worth US$9.82b, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. But it's clear that we should definitely closely examine whether it can manage its debt without dilution. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Formula One Group'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.

In the last year Formula One Group had a loss before interest and tax, and actually shrunk its revenue by 39%, to US$1.2b. To be frank that doesn't bode well.

Caveat Emptor

Not only did Formula One Group's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). Indeed, it lost US$279m 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. Another cause for caution is that is bled US$51m in negative free cash flow over the last twelve months. So suffice it to say we do consider the stock to be risky. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. Case in point: We've spotted 1 warning sign for Formula One Group you should be aware of.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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