Does Frontier Transport Holdings (JSE:FTH) 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 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, Frontier Transport Holdings Limited (JSE:FTH) does carry debt. But is this debt a concern to shareholders?

When Is Debt Dangerous?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. 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 Frontier Transport Holdings

What Is Frontier Transport Holdings's Net Debt?

You can click the graphic below for the historical numbers, but it shows that Frontier Transport Holdings had R284.5m of debt in September 2021, down from R451.6m, one year before. However, its balance sheet shows it holds R468.6m in cash, so it actually has R184.1m net cash.

How Healthy Is Frontier Transport Holdings' Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Frontier Transport Holdings had liabilities of R463.7m due within 12 months and liabilities of R525.4m due beyond that. Offsetting these obligations, it had cash of R468.6m as well as receivables valued at R146.0m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by R374.5m.

While this might seem like a lot, it is not so bad since Frontier Transport Holdings has a market capitalization of R1.55b, 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. Despite its noteworthy liabilities, Frontier Transport Holdings boasts net cash, so it's fair to say it does not have a heavy debt load!

Also good is that Frontier Transport Holdings grew its EBIT at 10% over the last year, further increasing its ability to manage debt. The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since Frontier Transport Holdings will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. Frontier Transport Holdings 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. Happily for any shareholders, Frontier Transport Holdings actually produced more free cash flow than EBIT over the last three years. That sort of strong cash conversion gets us as excited as the crowd when the beat drops at a Daft Punk concert.

Summing up

While Frontier Transport Holdings does have more liabilities than liquid assets, it also has net cash of R184.1m. And it impressed us with free cash flow of R374m, being 110% of its EBIT. So is Frontier Transport Holdings's debt a risk? It doesn't seem so to us. 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. Be aware that Frontier Transport Holdings is showing 4 warning signs in our investment analysis , and 1 of those is potentially serious...

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.