Falanx Cyber Security (LON:FCS) Is Carrying A Fair Bit Of Debt

Legendary fund manager Li Lu (who Charlie Munger backed) once said, ‘The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.’ 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. We note that Falanx Cyber Security Limited (LON:FCS) does have debt on its balance sheet. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

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. If things get really bad, the lenders can take control of the business. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. 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.

View our latest analysis for Falanx Cyber Security

What Is Falanx Cyber Security’s Debt?

You can click the graphic below for the historical numbers, but it shows that as of September 2022 Falanx Cyber Security had UK£2.38m of debt, an increase on UK£978.4k, over one year. However, it also had UK£1.96m in cash, and so its net debt is UK£421.1k.

A Look At Falanx Cyber Security’s Liabilities

We can see from the most recent balance sheet that Falanx Cyber Security had liabilities of UK£1.74m falling due within a year, and liabilities of UK£1.93m due beyond that. Offsetting this, it had UK£1.96m in cash and UK£1.22m in receivables that were due within 12 months. So it has liabilities totalling UK£501.8k more than its cash and near-term receivables, combined.

This state of affairs indicates that Falanx Cyber Security’s balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So it’s very unlikely that the UK£255.3m company is short on cash, but still worth keeping an eye on the balance sheet. But either way, Falanx Cyber Security has virtually no net debt, so it’s fair to say it does not have a heavy debt load! There’s no doubt that we learn most about debt from the balance sheet. But you can’t view debt in total isolation; since Falanx Cyber Security will need earnings to service that debt. So if you’re keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

Over 12 months, Falanx Cyber Security reported revenue of UK£3.5m, which is a gain of 44%, although it did not report any earnings before interest and tax. Shareholders probably have their fingers crossed that it can grow its way to profits.

Caveat Emptor

Despite the top line growth, Falanx Cyber Security still had an earnings before interest and tax (EBIT) loss over the last year. To be specific the EBIT loss came in at UK£2.4m. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. Another cause for caution is that is bled UK£2.7m in negative free cash flow over the last twelve months. So to be blunt we think it is risky. There’s no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet – far from it. Be aware that Falanx Cyber Security is showing 4 warning signs in our investment analysis , and 2 of those are concerning…

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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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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.