Is Journeo (LON:JNEO) Using Too Much Debt?

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 note that Journeo plc (LON:JNEO) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. 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 Journeo

How Much Debt Does Journeo Carry?

You can click the graphic below for the historical numbers, but it shows that Journeo had UK£1.16m of debt in December 2020, down from UK£1.71m, one year before. However, it does have UK£1.25m in cash offsetting this, leading to net cash of UK£95.0k.

How Healthy Is Journeo's Balance Sheet?

According to the last reported balance sheet, Journeo had liabilities of UK£7.31m due within 12 months, and liabilities of UK£2.24m due beyond 12 months. On the other hand, it had cash of UK£1.25m and UK£4.21m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by UK£4.08m.

Journeo has a market capitalization of UK£11.0m, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. But it's clear that we should definitely closely examine whether it can manage its debt without dilution. Despite its noteworthy liabilities, Journeo boasts net cash, so it's fair to say it does not have a heavy debt load!

Notably, Journeo made a loss at the EBIT level, last year, but improved that to positive EBIT of UK£310k in the last twelve months. 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 Journeo'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. While Journeo 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. Happily for any shareholders, Journeo actually produced more free cash flow than EBIT over the last year. That sort of strong cash generation warms our hearts like a puppy in a bumblebee suit.

Summing up

While Journeo does have more liabilities than liquid assets, it also has net cash of UK£95.0k. The cherry on top was that in converted 323% of that EBIT to free cash flow, bringing in UK£1.0m. So we are not troubled with Journeo's debt use. 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. To that end, you should learn about the 4 warning signs we've spotted with Journeo (including 1 which doesn't sit too well with us) .

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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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