Is FW Thorpe (LON:TFW) using too much debt?

Howard Marks said it well when he said that, rather than worrying about stock price volatility, “the possibility of permanent loss is the risk I worry about…and that every practical investor that I know is worried”. So it may be obvious that you need to take debt into account when thinking about the risk of a given stock, because too much debt can sink a business. Like many other companies FW Thorpe Plc (LON:TFW) uses debt. But does this debt worry shareholders?

What risk does debt carry?

Generally speaking, debt only becomes a real problem when a company cannot easily repay it, either by raising capital or with its own cash flow. If things go really bad, lenders can take over the business. Although not too common, we often see companies in debt permanently diluting their shareholders because lenders force them to raise capital at a ridiculous price. Of course, many companies use debt to finance their growth, without any negative consequences. The first step when considering a company’s debt levels is to consider its cash and debt together.

See our latest analysis for FW Thorpe

What is FW Thorpe’s net debt?

You can click on the graph below for historical figures, but it shows that in December 2021, FW Thorpe had debt of £11.1m, an increase from £73.0k, on a year. However, he has £41.0m in cash to offset this, which translates to a net cash of £30.0m.

TARGET: TFW Debt to Equity May 20, 2022

How healthy is FW Thorpe’s balance sheet?

We can see from the most recent balance sheet that FW Thorpe had liabilities of £34.5m due within a year, and liabilities of £16.8m due beyond. As compensation for these obligations, it had cash of £41.0 million as well as receivables valued at £29.7 million and due within 12 months. So he actually has £19.4million After liquid assets than total liabilities.

This surplus suggests that FW Thorpe has a conservative balance sheet, and could probably eliminate his debt without too much difficulty. In short, FW Thorpe has clean cash, so it’s fair to say he’s not heavily indebted!

But the bad news is that FW Thorpe has seen its EBIT plunge 13% in the last twelve months. We believe that this type of performance, if repeated frequently, could well spell trouble for the stock. The balance sheet is clearly the area to focus on when analyzing debt. But it’s FW Thorpe’s earnings that will influence the balance sheet going forward. So, if you want to know more about its earnings, it might be worth checking out this graph of its long-term trend.

Finally, a company can only repay its debts with cold hard cash, not with book profits. FW Thorpe may have net cash on the balance sheet, but it’s always interesting to see how well the company converts its earnings before interest and taxes (EBIT) into free cash flow, as this will influence both its needs and its capacity. . to manage debt. Over the past three years, FW Thorpe has recorded free cash flow of 71% of its EBIT, which is about normal, given that free cash flow excludes interest and taxes. This free cash flow puts the company in a good position to repay its debt, should it arise.

Summary

While we sympathize with investors who find debt a concern, you should bear in mind that FW Thorpe has a net cash position of £30.0m, as well as more liquid assets than liabilities. And it impressed us with free cash flow of £18m, or 71% of its EBIT. So we have no problem with FW Thorpe’s use of debt. When analyzing debt levels, the balance sheet is the obvious starting point. But at the end of the day, every business can contain risks that exist outside of the balance sheet. For example – FW Thorpe has 3 warning signs we think you should know.

In the end, sometimes it’s easier to focus on companies that don’t even need to take on debt. Readers can access a list of growth stocks with no net debt 100% freeright now.

This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts only using unbiased methodology and our articles are not intended to be financial advice. It is not a recommendation to buy or sell stocks and does not take into account your objectives or financial situation. Our goal is to bring you targeted long-term analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price-sensitive companies or qualitative materials. Simply Wall St has no position in the stocks mentioned.

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