Would Formula One Group (NASDAQ:FWON.K) Be Better Off With Less 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.' 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 can see that Formula One Group (NASDAQ:FWON.K) does use debt in its business. But is this debt a concern to shareholders?

When Is Debt A Problem?

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. If things get really bad, the lenders can take control of the business. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

Check out our latest analysis for Formula One Group

What Is Formula One Group's Net Debt?

The chart below, which you can click on for greater detail, shows that Formula One Group had US$3.63b in debt in September 2021; about the same as the year before. However, it also had US$2.20b in cash, and so its net debt is US$1.43b.

A Look At Formula One Group's Liabilities

Zooming in on the latest balance sheet data, we can see that Formula One Group had liabilities of US$1.35b due within 12 months and liabilities of US$3.40b due beyond that. Offsetting these obligations, it had cash of US$2.20b as well as receivables valued at US$110.0m due within 12 months. So it has liabilities totalling US$2.45b more than its cash and near-term receivables, combined.

Given Formula One Group has a humongous market capitalization of US$14.0b, it's hard to believe these liabilities pose much threat. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. 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 wasn't profitable at an EBIT level, but managed to grow its revenue by 55%, to US$1.8b. Shareholders probably have their fingers crossed that it can grow its way to profits.

Caveat Emptor

Despite the top line growth, Formula One Group still had an earnings before interest and tax (EBIT) loss over the last year. To be specific the EBIT loss came in at US$63m. 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. On the bright side, we note that trailing twelve month EBIT is worse than the free cash flow of US$481m and the profit of US$1.0m. So if we focus on those metrics there seems to be a chance the company will manage its debt without much trouble. 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. For instance, we've identified 1 warning sign for Formula One Group that you should be aware of.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.