Health Check: How Prudently Does Aukett Swanke Group (LON:AUK) Use Debt?

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 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 Aukett Swanke Group Plc (LON:AUK) does have debt on its balance sheet. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

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. 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. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for Aukett Swanke Group

How Much Debt Does Aukett Swanke Group Carry?

The image below, which you can click on for greater detail, shows that at September 2023 Aukett Swanke Group had debt of UK£2.69m, up from UK£649.0k in one year. However, it does have UK£522.0k in cash offsetting this, leading to net debt of about UK£2.17m.

A Look At Aukett Swanke Group's Liabilities

Zooming in on the latest balance sheet data, we can see that Aukett Swanke Group had liabilities of UK£8.68m due within 12 months and liabilities of UK£2.85m due beyond that. Offsetting these obligations, it had cash of UK£522.0k as well as receivables valued at UK£4.64m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by UK£6.37m.

This deficit casts a shadow over the UK£3.66m company, like a colossus towering over mere mortals. So we definitely think shareholders need to watch this one closely. After all, Aukett Swanke Group would likely require a major re-capitalisation if it had to pay its creditors today. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Aukett Swanke Group's earnings that will influence how the balance sheet holds up in the future. 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.

Over 12 months, Aukett Swanke Group reported revenue of UK£14m, which is a gain of 98%, although it did not report any earnings before interest and tax. Shareholders probably have their fingers crossed that it can grow its way to profits.

Caveat Emptor

Despite the top line growth, Aukett Swanke Group still had an earnings before interest and tax (EBIT) loss over the last year. To be specific the EBIT loss came in at UK£67k. When we look at that alongside the significant liabilities, we're not particularly confident about the company. We'd want to see some strong near-term improvements before getting too interested in the stock. But on the bright side the company actually produced a statutory profit of UK£82k and free cash flow of UK£1.1m. So there is definitely a chance that it can improve things in the next few years. 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 4 warning signs for Aukett Swanke Group (1 doesn't sit too well with us) 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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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.