The harsh reality for Ted Baker Plc (LON:TED) shareholders is that its auditors, KPMG LLP – Klynveld Peat Marwick Goerdeler, expressed doubts about its ability to continue as a going concern, in its reported results to January 2020. It is therefore fair to assume that, based on those financials, the company should strengthen its balance sheet in the short term, perhaps by issuing shares.
Since the company probably needs cash fairly quickly, it may be in a position where it has to accept whatever terms it can get. So current risks on the balance sheet could have a big impact on how shareholders fare from here. The big consideration is whether it can repay its debt, since in the worst case scenario, creditors could force the company to bankruptcy.
What Is Ted Baker’s Net Debt?
As you can see below, at the end of January 2020, Ted Baker had UK£180.1m of debt, up from UK£138.5m a year ago. Click the image for more detail. However, it does have UK£52.9m in cash offsetting this, leading to net debt of about UK£127.2m.
A Look At Ted Baker’s Liabilities
According to the last reported balance sheet, Ted Baker had liabilities of UK£316.8m due within 12 months, and liabilities of UK£135.5m due beyond 12 months. Offsetting these obligations, it had cash of UK£52.9m as well as receivables valued at UK£55.2m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by UK£344.2m.
This deficit casts a shadow over the UK£66.3m company, like a colossus towering over mere mortals. So we’d watch its balance sheet closely, without a doubt. At the end of the day, Ted Baker would probably need a major re-capitalization if its creditors were to demand repayment. The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine Ted Baker’s ability to maintain a healthy balance sheet going forward. So if you’re focused on the future you can check out this free report showing analyst profit forecasts.
In the last year Ted Baker’s revenue was pretty flat, and it made a negative EBIT. While that hardly impresses, its not too bad either.
Over the last twelve months Ted Baker produced an earnings before interest and tax (EBIT) loss. Indeed, it lost a very considerable UK£41m at the EBIT level. If you consider the significant liabilities mentioned above, we are extremely wary of this investment. Of course, it may be able to improve its situation with a bit of luck and good execution. Nevertheless, we would not bet on it given that it lost UK£70m in just last twelve months, and it doesn’t have much by way of liquid assets. So while it will probably survive, we think it’s risky; we’d treat it like chicken pox and try to avoid it. We prefer to avoid a company after its auditor has expressed any uncertainty about its ability to continue as a going concern. That’s because companies should always make sure the auditor has confidence that the company will continue as a going concern, in our view. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. Consider for instance, the ever-present spectre of investment risk. We’ve identified 4 warning signs with Ted Baker (at least 1 which doesn’t sit too well with us) , 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.
Love or hate this article? Concerned about the content? Get in touch with us directly. Alternatively, email email@example.com.
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. Thank you for reading.