Does Chico's FAS (NYSE:CHS) 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.' 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. We note that Chico's FAS, Inc. (NYSE:CHS) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

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. 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 thing to do when considering how much debt a business uses is to look at its cash and debt together.

View our latest analysis for Chico's FAS

How Much Debt Does Chico's FAS Carry?

The image below, which you can click on for greater detail, shows that Chico's FAS had debt of US$99.0m at the end of October 2021, a reduction from US$149.0m over a year. However, its balance sheet shows it holds US$137.5m in cash, so it actually has US$38.5m net cash.

How Strong Is Chico's FAS' Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Chico's FAS had liabilities of US$491.4m due within 12 months and liabilities of US$522.6m due beyond that. Offsetting these obligations, it had cash of US$137.5m as well as receivables valued at US$13.1m due within 12 months. So it has liabilities totalling US$863.5m more than its cash and near-term receivables, combined.

This deficit casts a shadow over the US$542.9m company, like a colossus towering over mere mortals. So we definitely think shareholders need to watch this one closely. At the end of the day, Chico's FAS would probably need a major re-capitalization if its creditors were to demand repayment. Chico's FAS boasts net cash, so it's fair to say it does not have a heavy debt load, even if it does have very significant liabilities, in total. 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 Chico's FAS can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Over 12 months, Chico's FAS reported revenue of US$1.7b, which is a gain of 16%, although it did not report any earnings before interest and tax. We usually like to see faster growth from unprofitable companies, but each to their own.

So How Risky Is Chico's FAS?

Although Chico's FAS had an earnings before interest and tax (EBIT) loss over the last twelve months, it generated positive free cash flow of US$44m. So although it is loss-making, it doesn't seem to have too much near-term balance sheet risk, keeping in mind the net cash. Given the lack of transparency around future revenue (and cashflow), we're nervous about this one, until it makes its first big sales. To us, it is a high risk play. 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. To that end, you should learn about the 3 warning signs we've spotted with Chico's FAS (including 1 which makes us a bit uncomfortable) .

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.