Stock Analysis

Floor & Decor Holdings (NYSE:FND) Has A Somewhat Strained Balance Sheet

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NYSE:FND
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The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a 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. We note that Floor & Decor Holdings, Inc. (NYSE:FND) does have debt on its balance sheet. 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. 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. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

Check out our latest analysis for Floor & Decor Holdings

What Is Floor & Decor Holdings's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of June 2022 Floor & Decor Holdings had US$265.7m of debt, an increase on US$200.9m, over one year. On the flip side, it has US$6.18m in cash leading to net debt of about US$259.6m.

debt-equity-history-analysis
NYSE:FND Debt to Equity History September 22nd 2022

A Look At Floor & Decor Holdings' Liabilities

We can see from the most recent balance sheet that Floor & Decor Holdings had liabilities of US$1.20b falling due within a year, and liabilities of US$1.51b due beyond that. Offsetting this, it had US$6.18m in cash and US$111.7m in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by US$2.59b.

While this might seem like a lot, it is not so bad since Floor & Decor Holdings has a market capitalization of US$7.80b, and so it could probably strengthen its balance sheet by raising capital if it needed to. However, it is still worthwhile taking a close look at its ability to pay off debt.

We measure a company's debt load relative to its earnings power by looking at its net debt divided by its earnings before interest, tax, depreciation, and amortization (EBITDA) and by calculating how easily its earnings before interest and tax (EBIT) cover its interest expense (interest cover). Thus we consider debt relative to earnings both with and without depreciation and amortization expenses.

Floor & Decor Holdings's net debt is only 0.54 times its EBITDA. And its EBIT covers its interest expense a whopping 68.0 times over. So you could argue it is no more threatened by its debt than an elephant is by a mouse. Floor & Decor Holdings's EBIT was pretty flat over the last year, but that shouldn't be an issue given the it doesn't have a lot of debt. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Floor & Decor Holdings 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, a business needs free cash flow to pay off debt; accounting profits just don't cut it. So we always check how much of that EBIT is translated into free cash flow. Over the last three years, Floor & Decor Holdings recorded negative free cash flow, in total. Debt is usually more expensive, and almost always more risky in the hands of a company with negative free cash flow. Shareholders ought to hope for an improvement.

Our View

Floor & Decor Holdings's conversion of EBIT to free cash flow and level of total liabilities definitely weigh on it, in our esteem. But the good news is it seems to be able to cover its interest expense with its EBIT with ease. We think that Floor & Decor Holdings's debt does make it a bit risky, after considering the aforementioned data points together. That's not necessarily a bad thing, since leverage can boost returns on equity, but it is something to be aware of. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. To that end, you should learn about the 2 warning signs we've spotted with Floor & Decor Holdings (including 1 which is a bit concerning) .

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.

Valuation is complex, but we're helping make it simple.

Find out whether Floor & Decor Holdings is potentially over or undervalued by checking out our comprehensive analysis, which includes fair value estimates, risks and warnings, dividends, insider transactions and financial health.

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About NYSE:FND

Floor & Decor Holdings

Floor & Decor Holdings, Inc. operates as a multi-channel specialty retailer and commercial flooring distributor of hard surface flooring and related accessories.

The Snowflake is a visual investment summary with the score of each axis being calculated by 6 checks in 5 areas.

Analysis AreaScore (0-6)
Valuation1
Future Growth4
Past Performance1
Financial Health4
Dividends0

Read more about these checks in the individual report sections or in our analysis model.

Reasonable growth potential with adequate balance sheet.