Trace Group Hold (BUL:T57) 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, Trace Group Hold PLC (BUL:T57) does carry debt. But should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

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. If things get really bad, the lenders can take control of the business. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. 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 Trace Group Hold

How Much Debt Does Trace Group Hold Carry?

You can click the graphic below for the historical numbers, but it shows that as of September 2020 Trace Group Hold had лв16.6m of debt, an increase on лв5.73m, over one year. However, its balance sheet shows it holds лв32.8m in cash, so it actually has лв16.2m net cash.

A Look At Trace Group Hold's Liabilities

According to the last reported balance sheet, Trace Group Hold had liabilities of лв126.0m due within 12 months, and liabilities of лв14.6m due beyond 12 months. Offsetting this, it had лв32.8m in cash and лв133.7m in receivables that were due within 12 months. So it actually has лв26.0m more liquid assets than total liabilities.

This excess liquidity suggests that Trace Group Hold is taking a careful approach to debt. Due to its strong net asset position, it is not likely to face issues with its lenders. Succinctly put, Trace Group Hold boasts net cash, so it's fair to say it does not have a heavy debt load!

The good news is that Trace Group Hold has increased its EBIT by 4.4% over twelve months, which should ease any concerns about debt repayment. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Trace Group Hold will need earnings to service that debt. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. Trace Group Hold 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. During the last three years, Trace Group Hold produced sturdy free cash flow equating to 76% of its EBIT, about what we'd expect. This cold hard cash means it can reduce its debt when it wants to.

Summing up

While it is always sensible to investigate a company's debt, in this case Trace Group Hold has лв16.2m in net cash and a decent-looking balance sheet. And it impressed us with free cash flow of лв15m, being 76% of its EBIT. So we don't think Trace Group Hold'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 Trace Group Hold that you should be aware of.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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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