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.' 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. We can see that Fortrea Holdings Inc. (NASDAQ:FTRE) does use debt in its business. But should shareholders be worried about its use of debt?

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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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. When we think about a company's use of debt, we first look at cash and debt together.

What Is Fortrea Holdings's Net Debt?

The image below, which you can click on for greater detail, shows that Fortrea Holdings had debt of US$1.12b at the end of December 2024, a reduction from US$1.59b over a year. However, it does have US$118.5m in cash offsetting this, leading to net debt of about US$1.01b.

How Healthy Is Fortrea Holdings' Balance Sheet?

According to the last reported balance sheet, Fortrea Holdings had liabilities of US$949.5m due within 12 months, and liabilities of US$1.27b due beyond 12 months. Offsetting these obligations, it had cash of US$118.5m as well as receivables valued at US$694.0m due within 12 months. So it has liabilities totalling US$1.40b more than its cash and near-term receivables, combined.

This deficit casts a shadow over the US$582.7m company, like a colossus towering over mere mortals. So we definitely think shareholders need to watch this one closely. After all, Fortrea Holdings would likely require a major re-capitalisation if it had to pay its creditors today. 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 Fortrea Holdings can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts .

See our latest analysis for Fortrea Holdings

In the last year Fortrea Holdings had a loss before interest and tax, and actually shrunk its revenue by 5.1%, to US$2.7b. That's not what we would hope to see.

Caveat Emptor

Importantly, Fortrea Holdings had an earnings before interest and tax (EBIT) loss over the last year. Indeed, it lost a very considerable US$112m at the EBIT level. When we look at that alongside the significant liabilities, we're not particularly confident about the company. We'd want to see some strong near-term improvements before getting too interested in the stock. It's fair to say the loss of US$272m didn't encourage us either; we'd like to see a profit. In the meantime, we consider the stock to be risky. 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. We've identified 1 warning sign with Fortrea Holdings , and understanding them should be part of your investment process.

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.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.