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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, FLYHT Aerospace Solutions Ltd. (CVE:FLY) does carry debt. But the more important question is: how much risk is that debt creating?
When Is Debt A Problem?
Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we examine debt levels, we first consider both cash and debt levels, together.
How Much Debt Does FLYHT Aerospace Solutions Carry?
You can click the graphic below for the historical numbers, but it shows that FLYHT Aerospace Solutions had CA$3.65m of debt in September 2021, down from CA$5.37m, one year before. However, it does have CA$5.81m in cash offsetting this, leading to net cash of CA$2.15m.
How Healthy Is FLYHT Aerospace Solutions' Balance Sheet?
The latest balance sheet data shows that FLYHT Aerospace Solutions had liabilities of CA$3.36m due within a year, and liabilities of CA$4.97m falling due after that. On the other hand, it had cash of CA$5.81m and CA$2.15m worth of receivables due within a year. So it has liabilities totalling CA$371.2k more than its cash and near-term receivables, combined.
Having regard to FLYHT Aerospace Solutions' size, it seems that its liquid assets are well balanced with its total liabilities. So it's very unlikely that the CA$29.1m company is short on cash, but still worth keeping an eye on the balance sheet. Despite its noteworthy liabilities, FLYHT Aerospace Solutions boasts net cash, so it's fair to say it does not have a heavy debt load! The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine FLYHT Aerospace Solutions'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.
Over 12 months, FLYHT Aerospace Solutions made a loss at the EBIT level, and saw its revenue drop to CA$12m, which is a fall of 16%. That's not what we would hope to see.
So How Risky Is FLYHT Aerospace Solutions?
Statistically speaking companies that lose money are riskier than those that make money. And the fact is that over the last twelve months FLYHT Aerospace Solutions lost money at the earnings before interest and tax (EBIT) line. And over the same period it saw negative free cash outflow of CA$4.6m and booked a CA$5.4m accounting loss. But at least it has CA$2.15m on the balance sheet to spend on growth, near-term. Overall, we'd say the stock is a bit risky, and we're usually very cautious until we see positive free cash flow. 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. For example, we've discovered 3 warning signs for FLYHT Aerospace Solutions that you should be aware of before investing here.
If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.
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.
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