Is Johnson Service Group (LON:JSG) Using Too Much 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.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. As with many other companies Johnson Service Group PLC (LON:JSG) makes use of debt. But the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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.

View our latest analysis for Johnson Service Group

What Is Johnson Service Group's Debt?

You can click the graphic below for the historical numbers, but it shows that Johnson Service Group had UK£1.60m of debt in December 2020, down from UK£95.8m, one year before. However, it does have UK£7.80m in cash offsetting this, leading to net cash of UK£6.20m.

A Look At Johnson Service Group's Liabilities

We can see from the most recent balance sheet that Johnson Service Group had liabilities of UK£73.4m falling due within a year, and liabilities of UK£54.9m due beyond that. Offsetting these obligations, it had cash of UK£7.80m as well as receivables valued at UK£33.0m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by UK£87.5m.

Given Johnson Service Group has a market capitalization of UK£758.7m, it's hard to believe these liabilities pose much threat. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. While it does have liabilities worth noting, Johnson Service Group also has more cash than debt, so we're pretty confident it can manage its debt safely. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Johnson Service Group's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

In the last year Johnson Service Group had a loss before interest and tax, and actually shrunk its revenue by 34%, to UK£230m. To be frank that doesn't bode well.

So How Risky Is Johnson Service Group?

Although Johnson Service Group had an earnings before interest and tax (EBIT) loss over the last twelve months, it generated positive free cash flow of UK£14m. So although it is loss-making, it doesn't seem to have too much near-term balance sheet risk, keeping in mind the net cash. With revenue growth uninspiring, we'd really need to see some positive EBIT before mustering much enthusiasm for this business. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. To that end, you should be aware of the 1 warning sign we've spotted with Johnson Service Group .

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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