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 note that Autins Group plc (LON:AUTG) does have debt on its balance sheet. But is this debt a concern to shareholders?
Why Does Debt Bring Risk?
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. 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, plenty of companies use debt to fund growth, without any negative consequences. When we examine debt levels, we first consider both cash and debt levels, together.
What Is Autins Group's Debt?
As you can see below, at the end of March 2021, Autins Group had UK£4.80m of debt, up from UK£4.35m a year ago. Click the image for more detail. On the flip side, it has UK£2.96m in cash leading to net debt of about UK£1.85m.
A Look At Autins Group's Liabilities
According to the last reported balance sheet, Autins Group had liabilities of UK£5.96m due within 12 months, and liabilities of UK£8.43m due beyond 12 months. Offsetting this, it had UK£2.96m in cash and UK£5.73m in receivables that were due within 12 months. So it has liabilities totalling UK£5.70m more than its cash and near-term receivables, combined.
This deficit is considerable relative to its market capitalization of UK£8.51m, so it does suggest shareholders should keep an eye on Autins Group's use of debt. This suggests shareholders would be heavily diluted if the company needed to shore up its balance sheet in a hurry. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Autins Group 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.
In the last year Autins Group had a loss before interest and tax, and actually shrunk its revenue by 17%, to UK£22m. That's not what we would hope to see.
Not only did Autins Group's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). Its EBIT loss was a whopping UK£1.1m. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. So we think its balance sheet is a little strained, though not beyond repair. For example, we would not want to see a repeat of last year's loss of UK£1.1m. So in short it's a really risky stock. 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. For instance, we've identified 2 warning signs for Autins Group (1 is concerning) you should be aware of.
Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.
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