David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. We note that Franklin Covey Co. (NYSE:FC) does have debt on its balance sheet. But is this debt a concern to shareholders?
When Is Debt A Problem?
Debt assists a business until the business has trouble paying it off, either with new capital or with free 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, 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.
How Much Debt Does Franklin Covey Carry?
You can click the graphic below for the historical numbers, but it shows that Franklin Covey had US$20.0m of debt in May 2021, down from US$36.1m, one year before. However, its balance sheet shows it holds US$35.8m in cash, so it actually has US$15.7m net cash.
How Strong Is Franklin Covey's Balance Sheet?
Zooming in on the latest balance sheet data, we can see that Franklin Covey had liabilities of US$104.6m due within 12 months and liabilities of US$33.7m due beyond that. Offsetting this, it had US$35.8m in cash and US$44.5m in receivables that were due within 12 months. So its liabilities total US$58.1m more than the combination of its cash and short-term receivables.
Since publicly traded Franklin Covey shares are worth a total of US$588.4m, it seems unlikely that this level of liabilities would be a major threat. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. Despite its noteworthy liabilities, Franklin Covey boasts net cash, so it's fair to say it does not have a heavy debt load!
If Franklin Covey can keep growing EBIT at last year's rate of 19% over the last year, then it will find its debt load easier to manage. 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 Franklin Covey 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 company can only pay off debt with cold hard cash, not accounting profits. While Franklin Covey has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. Over the last three years, Franklin Covey actually produced more free cash flow than EBIT. There's nothing better than incoming cash when it comes to staying in your lenders' good graces.
We could understand if investors are concerned about Franklin Covey's liabilities, but we can be reassured by the fact it has has net cash of US$15.7m. And it impressed us with free cash flow of US$38m, being 406% of its EBIT. So we don't think Franklin Covey's use of debt is risky. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. Be aware that Franklin Covey is showing 3 warning signs in our investment analysis , and 1 of those is a bit unpleasant...
If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.
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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