Here's Why Begbies Traynor Group (LON:BEG) Can Manage Its Debt Responsibly

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 Begbies Traynor Group plc (LON:BEG) makes use of debt. But should shareholders be worried about its use of debt?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. 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 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?

As you can see below, Begbies Traynor Group had UK£7.00m of debt at October 2020, down from UK£8.00m a year prior. But it also has UK£7.67m in cash to offset that, meaning it has UK£672.0k net cash.

How Strong Is Begbies Traynor Group's Balance Sheet?

The latest balance sheet data shows that Begbies Traynor Group had liabilities of UK£34.1m due within a year, and liabilities of UK£20.0m falling due after that. On the other hand, it had cash of UK£7.67m and UK£32.0m worth of receivables due within a year. So its liabilities total UK£14.5m more than the combination of its cash and short-term receivables.

Of course, Begbies Traynor Group has a market capitalization of UK£115.1m, so these liabilities are probably manageable. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. While it does have liabilities worth noting, Begbies Traynor Group also has more cash than debt, so we're pretty confident it can manage its debt safely.

Shareholders should be aware that Begbies Traynor Group's EBIT was down 48% last year. If that decline continues then paying off debt will be harder than selling foie gras at a vegan convention. When analysing debt levels, the balance sheet is the obvious place to start. 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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. 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

Although Begbies Traynor Group's balance sheet isn't particularly strong, due to the total liabilities, it is clearly positive to see that it has net cash of UK£672.0k. The cherry on top was that in converted 131% of that EBIT to free cash flow, bringing in UK£9.4m. So we are not troubled with Begbies Traynor Group's debt use. 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 1 warning sign for Begbies Traynor Group that you should be aware of before investing here.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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