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.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. We note that Fortrea Holdings Inc. (NASDAQ:FTRE) 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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. 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.

How Much Debt Does Fortrea Holdings Carry?

The image below, which you can click on for greater detail, shows that Fortrea Holdings had debt of US$1.13b at the end of September 2024, a reduction from US$1.60b over a year. However, it also had US$105.3m in cash, and so its net debt is US$1.02b.

How Healthy Is Fortrea Holdings' Balance Sheet?

We can see from the most recent balance sheet that Fortrea Holdings had liabilities of US$795.8m falling due within a year, and liabilities of US$1.35b due beyond that. Offsetting these obligations, it had cash of US$105.3m as well as receivables valued at US$689.1m due within 12 months. So it has liabilities totalling US$1.36b more than its cash and near-term receivables, combined.

This deficit is considerable relative to its market capitalization of US$1.79b, so it does suggest shareholders should keep an eye on Fortrea Holdings' use of debt. Should its lenders demand that it shore up the balance sheet, shareholders would likely face severe dilution. 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 Fortrea Holdings'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, Fortrea Holdings reported revenue of US$3.0b, which is a gain of 2.8%, although it did not report any earnings before interest and tax. We usually like to see faster growth from unprofitable companies, but each to their own.

Caveat Emptor

Importantly, Fortrea Holdings had an earnings before interest and tax (EBIT) loss over the last year. To be specific the EBIT loss came in at US$67m. 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. For example, we would not want to see a repeat of last year's loss of US$218m. In the meantime, we consider the stock very risky. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. Case in point: We've spotted 1 warning sign for Fortrea Holdings you should be aware of.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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.