Andrews Sykes Group (LON:ASY) Has A Rock Solid 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 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. As with many other companies Andrews Sykes Group plc (LON:ASY) makes use of debt. But the more important question is: how much risk is that debt creating?

What Risk Does Debt Bring?

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 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.

Check out our latest analysis for Andrews Sykes Group

What Is Andrews Sykes Group's Debt?

As you can see below, Andrews Sykes Group had UK£3.49m of debt at June 2020, down from UK£3.98m a year prior. However, its balance sheet shows it holds UK£32.1m in cash, so it actually has UK£28.6m net cash.

How Strong Is Andrews Sykes Group's Balance Sheet?

We can see from the most recent balance sheet that Andrews Sykes Group had liabilities of UK£18.4m falling due within a year, and liabilities of UK£12.4m due beyond that. Offsetting this, it had UK£32.1m in cash and UK£19.3m in receivables that were due within 12 months. So it actually has UK£20.6m more liquid assets than total liabilities.

This short term liquidity is a sign that Andrews Sykes Group could probably pay off its debt with ease, as its balance sheet is far from stretched. Simply put, the fact that Andrews Sykes Group has more cash than debt is arguably a good indication that it can manage its debt safely.

Fortunately, Andrews Sykes Group grew its EBIT by 5.6% in the last year, making that debt load look even more manageable. There's no doubt that we learn most about debt from the balance sheet. But it is Andrews Sykes Group's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. While Andrews Sykes 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. Over the most recent three years, Andrews Sykes Group recorded free cash flow worth 73% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This free cash flow puts the company in a good position to pay down debt, when appropriate.

Summing up

While we empathize with investors who find debt concerning, you should keep in mind that Andrews Sykes Group has net cash of UK£28.6m, as well as more liquid assets than liabilities. And it impressed us with free cash flow of UK£20m, being 73% of its EBIT. So we don't think Andrews Sykes 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 Andrews Sykes Group 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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