In This Article:
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 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 note that FW Thorpe Plc (LON:TFW) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?
When Is Debt Dangerous?
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 usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.
See our latest analysis for FW Thorpe
How Much Debt Does FW Thorpe Carry?
The image below, which you can click on for greater detail, shows that at December 2021 FW Thorpe had debt of UK£11.1m, up from UK£73.0k in one year. However, its balance sheet shows it holds UK£41.0m in cash, so it actually has UK£30.0m net cash.
How Healthy Is FW Thorpe's Balance Sheet?
Zooming in on the latest balance sheet data, we can see that FW Thorpe had liabilities of UK£34.5m due within 12 months and liabilities of UK£16.8m due beyond that. Offsetting these obligations, it had cash of UK£41.0m as well as receivables valued at UK£29.7m due within 12 months. So it actually has UK£19.4m more liquid assets than total liabilities.
This surplus suggests that FW Thorpe has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Simply put, the fact that FW Thorpe has more cash than debt is arguably a good indication that it can manage its debt safely.
On the other hand, FW Thorpe's EBIT dived 13%, over the last year. We think hat kind of performance, if repeated frequently, could well lead to difficulties for the stock. There's no doubt that we learn most about debt from the balance sheet. But it is FW Thorpe's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.