Would Fortrea Holdings (NASDAQ:FTRE) Be Better Off With Less Debt?

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. We note that Fortrea Holdings Inc. (NASDAQ:FTRE) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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, 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.

See our latest analysis for Fortrea Holdings

What Is Fortrea Holdings's Net Debt?

As you can see below, Fortrea Holdings had US$1.12b of debt at June 2024, down from US$1.61b a year prior. However, it also had US$127.3m in cash, and so its net debt is US$997.0m.

How Healthy Is Fortrea Holdings' Balance Sheet?

According to the last reported balance sheet, Fortrea Holdings had liabilities of US$749.0m due within 12 months, and liabilities of US$1.36b due beyond 12 months. Offsetting these obligations, it had cash of US$127.3m as well as receivables valued at US$637.9m due within 12 months. So its liabilities total US$1.34b more than the combination of its cash and short-term receivables.

This deficit is considerable relative to its market capitalization of US$2.08b, so it does suggest shareholders should keep an eye on Fortrea Holdings' use of debt. This suggests shareholders would be heavily diluted if the company needed to shore up its balance sheet in a hurry. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Fortrea Holdings 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.

Over 12 months, Fortrea Holdings reported revenue of US$3.0b, which is a gain of 2.4%, although it did not report any earnings before interest and tax. That rate of growth is a bit slow for our taste, but it takes all types to make a world.

Caveat Emptor

Over the last twelve months Fortrea Holdings produced an earnings before interest and tax (EBIT) loss. Indeed, it lost US$37m 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. So we think its balance sheet is a little strained, though not beyond repair. For example, we would not want to see a repeat of last year's loss of US$216m. In the meantime, we consider the stock very risky. For riskier companies like Fortrea Holdings 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.

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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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.