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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.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. We can see that Fintel Plc (LON:FNTL) does use debt in its business. 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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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.
View our latest analysis for Fintel
What Is Fintel's Debt?
As you can see below, Fintel had UK£6.80m of debt at December 2021, down from UK£29.7m a year prior. However, it does have UK£9.40m in cash offsetting this, leading to net cash of UK£2.60m.
A Look At Fintel's Liabilities
According to the last reported balance sheet, Fintel had liabilities of UK£19.4m due within 12 months, and liabilities of UK£15.4m due beyond 12 months. Offsetting these obligations, it had cash of UK£9.40m as well as receivables valued at UK£9.80m due within 12 months. So it has liabilities totalling UK£15.6m more than its cash and near-term receivables, combined.
Since publicly traded Fintel shares are worth a total of UK£217.1m, it seems unlikely that this level of liabilities would be a major threat. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. While it does have liabilities worth noting, Fintel also has more cash than debt, so we're pretty confident it can manage its debt safely.
Fortunately, Fintel grew its EBIT by 5.3% in the last year, making that debt load look even more manageable. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if Fintel 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.