Yahoo Finance Does Five Star Senior Living (NASDAQ:FVE) Have A Healthy Balance Sheet?
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. Importantly, Five Star Senior Living Inc. (NASDAQ:FVE) does carry debt. But the more important question is: how much risk is that debt creating?
What Risk Does Debt Bring?
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. 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. 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 Five Star Senior Living
What Is Five Star Senior Living's Net Debt?
You can click the graphic below for the historical numbers, but it shows that Five Star Senior Living had US$7.53m of debt in December 2019, down from US$59.4m, one year before. But on the other hand it also has US$52.8m in cash, leading to a US$45.3m net cash position.
How Healthy Is Five Star Senior Living's Balance Sheet?
The latest balance sheet data shows that Five Star Senior Living had liabilities of US$164.3m due within a year, and liabilities of US$61.5m falling due after that. Offsetting this, it had US$52.8m in cash and US$39.7m in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by US$133.3m.
This deficit is considerable relative to its market capitalization of US$148.0m, so it does suggest shareholders should keep an eye on Five Star Senior Living's use of debt. This suggests shareholders would heavily diluted if the company needed to shore up its balance sheet in a hurry. While it does have liabilities worth noting, Five Star Senior Living also has more cash than debt, so we're pretty confident it can manage its debt safely. When analysing debt levels, the balance sheet is the obvious place to start. But it is Five Star Senior Living'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.
In the last year Five Star Senior Living wasn't profitable at an EBIT level, but managed to grow its revenue by 28%, to US$1.4b. Shareholders probably have their fingers crossed that it can grow its way to profits.
So How Risky Is Five Star Senior Living?
We have no doubt that loss making companies are, in general, riskier than profitable ones. And in the last year Five Star Senior Living had negative earnings before interest and tax (EBIT), truth be told. And over the same period it saw negative free cash outflow of US$66m and booked a US$20m accounting loss. Given it only has net cash of US$45.3m, the company may need to raise more capital if it doesn't reach break-even soon. With very solid revenue growth in the last year, Five Star Senior Living may be on a path to profitability. Pre-profit companies are often risky, but they can also offer great rewards. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. To that end, you should learn about the 3 warning signs we've spotted with Five Star Senior Living (including 1 which is is significant) .
Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.
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.
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