Is 1-800-FLOWERS.COM (NASDAQ:FLWS) Using Too Much Debt?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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.

What Risk Does Debt Bring?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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.

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

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

The image below, which you can click on for greater detail, shows that 1-800-FLOWERS.COM had debt of US$171.8m at the end of December 2021, a reduction from US$185.9m over a year. However, it does have US$271.1m in cash offsetting this, leading to net cash of US$99.2m.

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

According to the last reported balance sheet, 1-800-FLOWERS.COM had liabilities of US$420.9m due within 12 months, and liabilities of US$335.4m due beyond 12 months. On the other hand, it had cash of US$271.1m and US$77.8m worth of receivables due within a year. So its liabilities total US$407.5m more than the combination of its cash and short-term receivables.

This deficit isn't so bad because 1-800-FLOWERS.COM is worth US$836.5m, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. However, it is still worthwhile taking a close look at its ability to pay off debt. While it does have liabilities worth noting, 1-800-FLOWERS.COM also has more cash than debt, so we're pretty confident it can manage its debt safely.

But the bad news is that 1-800-FLOWERS.COM has seen its EBIT plunge 18% in the last twelve months. We think hat kind of performance, if repeated frequently, could well lead to difficulties for the stock. 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, a business needs free cash flow to pay off debt; accounting profits just don't cut it. 1-800-FLOWERS.COM may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. Over the last three years, 1-800-FLOWERS.COM recorded free cash flow worth a fulsome 98% of its EBIT, which is stronger than we'd usually expect. That puts it in a very strong position to pay down debt.

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$99.2m. The cherry on top was that in converted 98% of that EBIT to free cash flow, bringing in -US$30m. So we are not troubled with 1-800-FLOWERS.COM's debt use. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. Case in point: We've spotted 2 warning signs for 1-800-FLOWERS.COM you should be aware of, and 1 of them is significant.

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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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.