Is Safestyle UK (LON:SFE) Using Too Much Debt?

Warren Buffett famously said, '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. As with many other companies Safestyle UK plc (LON:SFE) 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. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

See our latest analysis for Safestyle UK

What Is Safestyle UK's Debt?

As you can see below, Safestyle UK had UK£4.13m of debt, at January 2021, which is about the same as the year before. You can click the chart for greater detail. However, it does have UK£11.7m in cash offsetting this, leading to net cash of UK£7.58m.

A Look At Safestyle UK's Liabilities

According to the last reported balance sheet, Safestyle UK had liabilities of UK£25.6m due within 12 months, and liabilities of UK£11.5m due beyond 12 months. Offsetting these obligations, it had cash of UK£11.7m as well as receivables valued at UK£2.60m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by UK£22.8m.

Safestyle UK has a market capitalization of UK£68.4m, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. Despite its noteworthy liabilities, Safestyle UK boasts net cash, so it's fair to say it does not have a heavy debt load! The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if Safestyle UK can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Over 12 months, Safestyle UK made a loss at the EBIT level, and saw its revenue drop to UK£113m, which is a fall of 10.0%. That's not what we would hope to see.

So How Risky Is Safestyle UK?

Although Safestyle UK had an earnings before interest and tax (EBIT) loss over the last twelve months, it generated positive free cash flow of UK£2.9m. So taking that on face value, and considering the net cash situation, we don't think that the stock is too risky in the near term. With revenue growth uninspiring, we'd really need to see some positive EBIT before mustering much enthusiasm for this business. 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 example, we've discovered 4 warning signs for Safestyle UK (2 are a bit unpleasant!) that you should be aware of before investing here.

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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