Yahoo Finance Firestone Diamonds (LON:FDI) Has Debt But No Earnings; Should You Worry?
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 seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. Importantly, Firestone Diamonds plc (LON:FDI) does carry debt. But the real question is whether this debt is making the company risky.
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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first step when considering a company's debt levels is to consider its cash and debt together.
See our latest analysis for Firestone Diamonds
What Is Firestone Diamonds's Debt?
The chart below, which you can click on for greater detail, shows that Firestone Diamonds had US$97.2m in debt in December 2018; about the same as the year before. On the flip side, it has US$26.4m in cash leading to net debt of about US$70.8m.
A Look At Firestone Diamonds's Liabilities
We can see from the most recent balance sheet that Firestone Diamonds had liabilities of US$18.6m falling due within a year, and liabilities of US$94.9m due beyond that. On the other hand, it had cash of US$26.4m and US$1.92m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by US$85.1m.
The deficiency here weighs heavily on the US$7.31m company itself, as if a child were struggling under the weight of an enormous back-pack full of books, his sports gear, and a trumpet." So we'd watch its balance sheet closely, without a doubt After all, Firestone Diamonds would likely require a major re-capitalisation if it had to pay its creditors today. The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine Firestone Diamonds's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.
Over 12 months, Firestone Diamonds reported revenue of US$64m, which is a gain of 145%, although it did not report any earnings before interest and tax. So its pretty obvious shareholders are hoping for more growth!
Caveat Emptor
Despite the top line growth, Firestone Diamonds still had negative earnings before interest and tax (EBIT), over the last year. Its EBIT loss was a whopping US$5.0m. 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. Like every long-shot we're sure it has a glossy presentation outlining its blue-sky potential. But the reality is that it is low on liquid assets relative to liabilities, and it lost US$11m in the last year. So we're about as excited about owning this stock as hiking up a snowy mountain with wet socks on in the rain. It's too risky for us. For riskier companies like Firestone Diamonds 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.
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