Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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 Futebol Clube do Porto - Futebol, S.A.D. (ELI:FCP) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

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. 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. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for Futebol Clube do Porto - FutebolD

How Much Debt Does Futebol Clube do Porto - FutebolD Carry?

You can click the graphic below for the historical numbers, but it shows that as of December 2018 Futebol Clube do Porto - FutebolD had €219.8m of debt, an increase on €192.6m, over one year. However, it does have €32.6m in cash offsetting this, leading to net debt of about €187.2m.

A Look At Futebol Clube do Porto - FutebolD's Liabilities

According to the last reported balance sheet, Futebol Clube do Porto - FutebolD had liabilities of €173.4m due within 12 months, and liabilities of €224.0m due beyond 12 months. Offsetting this, it had €32.6m in cash and €87.0m in receivables that were due within 12 months. So its liabilities total €277.8m more than the combination of its cash and short-term receivables.

This deficit casts a shadow over the €13.5m company, like a colossus towering over mere mortals. So we'd watch its balance sheet closely, without a doubt At the end of the day, Futebol Clube do Porto - FutebolD would probably need a major re-capitalization if its creditors were to demand repayment. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Futebol Clube do Porto - FutebolD will need earnings to service that debt. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

In the last year Futebol Clube do Porto - FutebolD managed to grow its revenue by 48%, to €151m. Shareholders probably have their fingers crossed that it can grow its way to profits.

Caveat Emptor

Even though Futebol Clube do Porto - FutebolD managed to grow its top line quite deftly, the cold hard truth is that it is losing money on the EBIT line. Its EBIT loss was a whopping €28m. When you combine this with the very significant balance sheet liabilities mentioned above, we are so wary of it that we are basically at a loss for the right words. Sure, the company might have a nice story about how they are going on to a brighter future. But on the bright side the company actually produced a statutory profit of €2.6m and free cash flow of €9.9m. So its situation may not be as precarious as the EBIT would imply. For riskier companies like Futebol Clube do Porto - FutebolD I always like to keep an eye on the long term profit and revenue trends. Fortunately, you can click to see our interactive graph of its profit, revenue, and operating cashflow.

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.

We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.

If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned. Thank you for reading.