Does Johns Lyng Group (ASX:JLG) Have A Healthy Balance Sheet?

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. We can see that Johns Lyng Group Limited (ASX:JLG) does use debt in its business. But is this debt a concern to shareholders?

When Is Debt Dangerous?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. 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 Johns Lyng Group

How Much Debt Does Johns Lyng Group Carry?

The image below, which you can click on for greater detail, shows that at December 2020 Johns Lyng Group had debt of AU$16.6m, up from AU$4.29m in one year. But on the other hand it also has AU$53.2m in cash, leading to a AU$36.7m net cash position.

A Look At Johns Lyng Group's Liabilities

Zooming in on the latest balance sheet data, we can see that Johns Lyng Group had liabilities of AU$125.3m due within 12 months and liabilities of AU$28.6m due beyond that. On the other hand, it had cash of AU$53.2m and AU$82.8m worth of receivables due within a year. So its liabilities total AU$17.9m more than the combination of its cash and short-term receivables.

Having regard to Johns Lyng Group's size, it seems that its liquid assets are well balanced with its total liabilities. So while it's hard to imagine that the AU$1.11b company is struggling for cash, we still think it's worth monitoring its balance sheet. While it does have liabilities worth noting, Johns Lyng Group also has more cash than debt, so we're pretty confident it can manage its debt safely.

In addition to that, we're happy to report that Johns Lyng Group has boosted its EBIT by 54%, thus reducing the spectre of future debt repayments. 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 Johns Lyng Group'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.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. Johns Lyng Group may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. Happily for any shareholders, Johns Lyng Group actually produced more free cash flow than EBIT over the last three years. That sort of strong cash conversion gets us as excited as the crowd when the beat drops at a Daft Punk concert.

Summing up

While it is always sensible to look at a company's total liabilities, it is very reassuring that Johns Lyng Group has AU$36.7m in net cash. And it impressed us with free cash flow of AU$62m, being 118% of its EBIT. So we don't think Johns Lyng Group's use of debt 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. For instance, we've identified 1 warning sign for Johns Lyng Group that 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. 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.
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