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 Fulcrum Utility Services Limited (LON:FCRM) 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 is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.
Check out our latest analysis for Fulcrum Utility Services
What Is Fulcrum Utility Services's Debt?
The image below, which you can click on for greater detail, shows that at March 2019 Fulcrum Utility Services had debt of UK£3.00m, up from none in one year. But it also has UK£6.82m in cash to offset that, meaning it has UK£3.82m net cash.
How Strong Is Fulcrum Utility Services's Balance Sheet?
Zooming in on the latest balance sheet data, we can see that Fulcrum Utility Services had liabilities of UK£40.4m due within 12 months and liabilities of UK£5.19m due beyond that. Offsetting these obligations, it had cash of UK£6.82m as well as receivables valued at UK£15.5m due within 12 months. So its liabilities total UK£23.2m more than the combination of its cash and short-term receivables.
While this might seem like a lot, it is not so bad since Fulcrum Utility Services has a market capitalization of UK£53.3m, and so it could probably strengthen its balance sheet by raising capital if it needed to. But it's clear that we should definitely closely examine whether it can manage its debt without dilution. While it does have liabilities worth noting, Fulcrum Utility Services also has more cash than debt, so we're pretty confident it can manage its debt safely.
On the other hand, Fulcrum Utility Services saw its EBIT drop by 4.3% in the last twelve months. That sort of decline, if sustained, will obviously make debt harder to handle. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine Fulcrum Utility Services'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.