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

Warren Buffett famously said, '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, Formula One Group (NASDAQ:FWON.K) does carry debt. But the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. If things get really bad, the lenders can take control of the business. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for Formula One Group

What Is Formula One Group's Net Debt?

The image below, which you can click on for greater detail, shows that Formula One Group had debt of US$3.76b at the end of December 2020, a reduction from US$5.68b over a year. However, it also had US$1.68b in cash, and so its net debt is US$2.08b.

A Look At Formula One Group's Liabilities

According to the last reported balance sheet, Formula One Group had liabilities of US$692.0m due within 12 months, and liabilities of US$3.94b due beyond 12 months. On the other hand, it had cash of US$1.68b and US$121.0m worth of receivables due within a year. So its liabilities total US$2.83b more than the combination of its cash and short-term receivables.

This deficit isn't so bad because Formula One Group is worth a massive US$10.0b, 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. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if Formula One Group can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

In the last year Formula One Group had a loss before interest and tax, and actually shrunk its revenue by 43%, to US$1.1b. That makes us nervous, to say the least.

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$444m at the EBIT level. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. However, it doesn't help that it burned through US$160m of cash over the last year. So suffice it to say we do consider the stock to be risky. For riskier companies like Formula One Group I always like to keep an eye on whether insiders are buying or selling. So click here if you want to find out for yourself.

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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