Begbies Traynor Group (LON:BEG) Could Easily Take On More Debt

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the 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. As with many other companies Begbies Traynor Group plc (LON:BEG) makes use of debt. 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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. 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.

View our latest analysis for Begbies Traynor Group

How Much Debt Does Begbies Traynor Group Carry?

The image below, which you can click on for greater detail, shows that Begbies Traynor Group had debt of UK£6.00m at the end of October 2021, a reduction from UK£7.00m over a year. However, it does have UK£7.17m in cash offsetting this, leading to net cash of UK£1.17m.

How Strong Is Begbies Traynor Group's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Begbies Traynor Group had liabilities of UK£43.3m due within 12 months and liabilities of UK£20.4m due beyond that. Offsetting these obligations, it had cash of UK£7.17m as well as receivables valued at UK£47.2m due within 12 months. So its liabilities total UK£9.31m more than the combination of its cash and short-term receivables.

Since publicly traded Begbies Traynor Group shares are worth a total of UK£180.9m, it seems unlikely that this level of liabilities would be a major threat. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. Despite its noteworthy liabilities, Begbies Traynor Group boasts net cash, so it's fair to say it does not have a heavy debt load!

Even more impressive was the fact that Begbies Traynor Group grew its EBIT by 108% over twelve months. That boost will make it even easier to pay down debt going forward. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if Begbies Traynor Group can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. While Begbies Traynor 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 last three years, Begbies Traynor Group actually produced more free cash flow than EBIT. There's nothing better than incoming cash when it comes to staying in your lenders' good graces.

Summing up

While it is always sensible to look at a company's total liabilities, it is very reassuring that Begbies Traynor Group has UK£1.17m in net cash. And it impressed us with free cash flow of UK£7.1m, being 121% of its EBIT. So is Begbies Traynor Group's debt a risk? It doesn't seem so to us. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. Case in point: We've spotted 1 warning sign for Begbies Traynor Group you should be aware of.

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. 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.