Does 1-800-FLOWERS.COM (NASDAQ:FLWS) Have A Healthy Balance Sheet?

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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 can see that 1-800-FLOWERS.COM, Inc. (NASDAQ:FLWS) does use debt in its business. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for 1-800-FLOWERS.COM

How Much Debt Does 1-800-FLOWERS.COM Carry?

You can click the graphic below for the historical numbers, but it shows that as of March 2024 1-800-FLOWERS.COM had US$189.4m of debt, an increase on US$148.1m, over one year. However, it does have US$184.0m in cash offsetting this, leading to net debt of about US$5.48m.

How Healthy Is 1-800-FLOWERS.COM's Balance Sheet?

The latest balance sheet data shows that 1-800-FLOWERS.COM had liabilities of US$210.3m due within a year, and liabilities of US$344.4m falling due after that. Offsetting this, it had US$184.0m in cash and US$26.8m in receivables that were due within 12 months. So it has liabilities totalling US$343.9m more than its cash and near-term receivables, combined.

While this might seem like a lot, it is not so bad since 1-800-FLOWERS.COM has a market capitalization of US$669.7m, and so it could probably strengthen its balance sheet by raising capital if it needed to. But it's clear that we should definitely closely examine whether it can manage its debt without dilution. Carrying virtually no net debt, 1-800-FLOWERS.COM has a very light debt load indeed.

In order to size up a company's debt relative to its earnings, we calculate its net debt divided by its earnings before interest, tax, depreciation, and amortization (EBITDA) and its earnings before interest and tax (EBIT) divided by its interest expense (its interest cover). This way, we consider both the absolute quantum of the debt, as well as the interest rates paid on it.

1-800-FLOWERS.COM's net debt to EBITDA ratio is very low, at 0.066, suggesting the debt is only trivial. But EBIT was only 2.6 times the interest expense last year, so the borrowing is clearly weighing on the business somewhat. Also relevant is that 1-800-FLOWERS.COM has grown its EBIT by a very respectable 23% in the last year, thus enhancing its ability to pay down debt. 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 1-800-FLOWERS.COM can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. So we always check how much of that EBIT is translated into free cash flow. In the last three years, 1-800-FLOWERS.COM created free cash flow amounting to 6.7% of its EBIT, an uninspiring performance. That limp level of cash conversion undermines its ability to manage and pay down debt.

Our View

While 1-800-FLOWERS.COM's interest cover has us nervous. To wit both its net debt to EBITDA and EBIT growth rate were encouraging signs. Looking at all the angles mentioned above, it does seem to us that 1-800-FLOWERS.COM is a somewhat risky investment as a result of its debt. That's not necessarily a bad thing, since leverage can boost returns on equity, but it is something to be aware of. Given our hesitation about the stock, it would be good to know if 1-800-FLOWERS.COM insiders have sold any shares recently. You click here to find out if insiders have sold recently.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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.

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