Is Five Point Holdings (NYSE:FPH) Weighed On By Its Debt Load?

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.' 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, Five Point Holdings, LLC (NYSE:FPH) does carry debt. But the real question is whether this debt is making the company risky.

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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, 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. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for Five Point Holdings

What Is Five Point Holdings's Net Debt?

As you can see below, Five Point Holdings had US$713.7m of debt, at December 2022, which is about the same as the year before. You can click the chart for greater detail. However, it does have US$131.8m in cash offsetting this, leading to net debt of about US$582.0m.

How Strong Is Five Point Holdings' Balance Sheet?

According to the last reported balance sheet, Five Point Holdings had liabilities of US$94.4m due within 12 months, and liabilities of US$898.3m due beyond 12 months. Offsetting these obligations, it had cash of US$131.8m as well as receivables valued at US$87.0m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by US$774.0m.

This deficit casts a shadow over the US$349.3m company, like a colossus towering over mere mortals. So we'd watch its balance sheet closely, without a doubt. After all, Five Point Holdings would likely require a major re-capitalisation if it had to pay its creditors today. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Five Point Holdings's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

In the last year Five Point Holdings had a loss before interest and tax, and actually shrunk its revenue by 81%, to US$43m. That makes us nervous, to say the least.

Caveat Emptor

Not only did Five Point Holdings's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). Its EBIT loss was a whopping US$39m. Considering that alongside the liabilities mentioned above make us nervous about the company. We'd want to see some strong near-term improvements before getting too interested in the stock. Not least because it burned through US$94m in negative free cash flow over the last year. That means it's on the risky side of things. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. For example, we've discovered 1 warning sign for Five Point Holdings that you should be aware of before investing here.

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.