Yahoo Finance TechnipFMC (NYSE:FTI) Seems To Be Using A Lot Of Debt
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 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. As with many other companies TechnipFMC plc (NYSE:FTI) makes use of debt. But is this debt a concern to shareholders?
What Risk Does Debt Bring?
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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, together.
See our latest analysis for TechnipFMC
What Is TechnipFMC's Net Debt?
The chart below, which you can click on for greater detail, shows that TechnipFMC had US$3.86b in debt in September 2020; about the same as the year before. However, it does have US$4.36b in cash offsetting this, leading to net cash of US$494.9m.
A Look At TechnipFMC's Liabilities
Zooming in on the latest balance sheet data, we can see that TechnipFMC had liabilities of US$10.0b due within 12 months and liabilities of US$4.62b due beyond that. On the other hand, it had cash of US$4.36b and US$4.56b worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by US$5.73b.
Given this deficit is actually higher than the company's market capitalization of US$4.23b, we think shareholders really should watch TechnipFMC's debt levels, like a parent watching their child ride a bike for the first time. Hypothetically, extremely heavy dilution would be required if the company were forced to pay down its liabilities by raising capital at the current share price. TechnipFMC boasts net cash, so it's fair to say it does not have a heavy debt load, even if it does have very significant liabilities, in total.
The bad news is that TechnipFMC saw its EBIT decline by 13% over the last year. If earnings continue to decline at that rate then handling the debt will be more difficult than taking three children under 5 to a fancy pants restaurant. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if TechnipFMC can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.
Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While TechnipFMC has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. Over the last three years, TechnipFMC recorded negative free cash flow, in total. Debt is far more risky for companies with unreliable free cash flow, so shareholders should be hoping that the past expenditure will produce free cash flow in the future.
Summing up
Although TechnipFMC's balance sheet isn't particularly strong, due to the total liabilities, it is clearly positive to see that it has net cash of US$494.9m. However, we do find both TechnipFMC's conversion of EBIT to free cash flow and its interest cover troubling. So even though it has net cash, we do think the business has some risks worth watching. 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 be aware of the 1 warning sign we've spotted with TechnipFMC .
When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.
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. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.
Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.
