Is 1-800-FLOWERS.COM (NASDAQ:FLWS) A Risky Investment?

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.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. Importantly, 1-800-FLOWERS.COM, Inc. (NASDAQ:FLWS) does carry debt. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for 1-800-FLOWERS.COM

What Is 1-800-FLOWERS.COM's Net Debt?

You can click the graphic below for the historical numbers, but it shows that 1-800-FLOWERS.COM had US$152.8m of debt in January 2023, down from US$171.8m, one year before. However, its balance sheet shows it holds US$189.7m in cash, so it actually has US$36.9m net cash.

A Look At 1-800-FLOWERS.COM's Liabilities

We can see from the most recent balance sheet that 1-800-FLOWERS.COM had liabilities of US$344.3m falling due within a year, and liabilities of US$312.2m due beyond that. Offsetting this, it had US$189.7m in cash and US$53.0m in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by US$413.7m.

This deficit is considerable relative to its market capitalization of US$676.2m, so it does suggest shareholders should keep an eye on 1-800-FLOWERS.COM's use of debt. This suggests shareholders would be heavily diluted if the company needed to shore up its balance sheet in a hurry. Despite its noteworthy liabilities, 1-800-FLOWERS.COM boasts net cash, so it's fair to say it does not have a heavy debt load!

Shareholders should be aware that 1-800-FLOWERS.COM's EBIT was down 83% last year. If that decline continues then paying off debt will be harder than selling foie gras at a vegan convention. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine 1-800-FLOWERS.COM's ability to maintain a healthy balance sheet going forward. 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. While 1-800-FLOWERS.COM has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. Over the most recent three years, 1-800-FLOWERS.COM recorded free cash flow worth 62% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This free cash flow puts the company in a good position to pay down debt, when appropriate.

Summing Up

Although 1-800-FLOWERS.COM's balance sheet isn't particularly strong, due to the total liabilities, it is clearly positive to see that it has net cash of US$36.9m. So although we see some areas for improvement, we're not too worried about 1-800-FLOWERS.COM's balance sheet. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. Case in point: We've spotted 3 warning signs for 1-800-FLOWERS.COM you should be aware of.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.