Johns Lyng Group (ASX:JLG) Has A Rock Solid Balance Sheet

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' 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. Importantly, Johns Lyng Group Limited (ASX:JLG) does carry debt. But the more important question is: how much risk is that debt creating?

What Risk Does Debt Bring?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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 think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for Johns Lyng Group

How Much Debt Does Johns Lyng Group Carry?

You can click the graphic below for the historical numbers, but it shows that as of December 2022 Johns Lyng Group had AU$40.1m of debt, an increase on AU$21.1m, over one year. However, it does have AU$82.6m in cash offsetting this, leading to net cash of AU$42.5m.

A Look At Johns Lyng Group's Liabilities

The latest balance sheet data shows that Johns Lyng Group had liabilities of AU$264.8m due within a year, and liabilities of AU$63.7m falling due after that. On the other hand, it had cash of AU$82.6m and AU$240.5m worth of receivables due within a year. So these liquid assets roughly match the total liabilities.

This state of affairs indicates that Johns Lyng Group'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 AU$1.61b company is short on cash, but still worth keeping an eye on the 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 77%, thus reducing the spectre of future debt repayments. When analysing debt levels, the balance sheet is the obvious place to start. 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, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While Johns Lyng Group has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. During the last three years, Johns Lyng Group produced sturdy free cash flow equating to 74% of its EBIT, about what we'd expect. This cold hard cash means it can reduce its debt when it wants to.

Summing Up

We could understand if investors are concerned about Johns Lyng Group's liabilities, but we can be reassured by the fact it has has net cash of AU$42.5m. And we liked the look of last year's 77% year-on-year EBIT growth. So we don't think Johns Lyng Group's use of debt is risky. The balance sheet is clearly the area to focus on when you are analysing debt. 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.

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.

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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.