FRP Holdings (NASDAQ:FRPH) 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. As with many other companies FRP Holdings, Inc. (NASDAQ:FRPH) makes use of debt. But the more important question is: how much risk is that debt creating?

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 common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. 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.

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How Much Debt Does FRP Holdings Carry?

As you can see below, FRP Holdings had US$178.5m of debt, at June 2022, which is about the same as the year before. You can click the chart for greater detail. However, it does have US$159.3m in cash offsetting this, leading to net debt of about US$19.2m.

How Strong Is FRP Holdings' Balance Sheet?

Zooming in on the latest balance sheet data, we can see that FRP Holdings had liabilities of US$5.21m due within 12 months and liabilities of US$246.9m due beyond that. Offsetting this, it had US$159.3m in cash and US$1.42m in receivables that were due within 12 months. So it has liabilities totalling US$91.4m more than its cash and near-term receivables, combined.

Since publicly traded FRP Holdings shares are worth a total of US$532.8m, it seems unlikely that this level of liabilities would be a major threat. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since FRP Holdings will need earnings to service that debt. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

Over 12 months, FRP Holdings reported revenue of US$29m, which is a gain of 45%, although it did not report any earnings before interest and tax. Shareholders probably have their fingers crossed that it can grow its way to profits.

Caveat Emptor

Despite the top line growth, FRP Holdings still had an earnings before interest and tax (EBIT) loss over the last year. To be specific the EBIT loss came in at US$2.0m. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. So we think its balance sheet is a little strained, though not beyond repair. Surprisingly, we note that it actually reported positive free cash flow of US$20m and a profit of US$1.1m. So one might argue that there's still a chance it can get things on the right track. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. For example FRP Holdings has 3 warning signs (and 1 which can't be ignored) we think you should know about.

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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