Would Johnson Service Group (LON:JSG) Be Better Off With Less Debt?

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says '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. As with many other companies Johnson Service Group PLC (LON:JSG) makes use of debt. But the real question is whether this debt is making the company risky.

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for Johnson Service Group

How Much Debt Does Johnson Service Group Carry?

You can click the graphic below for the historical numbers, but it shows that as of June 2021 Johnson Service Group had UK£15.7m of debt, an increase on UK£7.40m, over one year. However, because it has a cash reserve of UK£6.80m, its net debt is less, at about UK£8.90m.

A Look At Johnson Service Group's Liabilities

The latest balance sheet data shows that Johnson Service Group had liabilities of UK£93.4m due within a year, and liabilities of UK£50.8m falling due after that. On the other hand, it had cash of UK£6.80m and UK£45.5m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by UK£91.9m.

Of course, Johnson Service Group has a market capitalization of UK£612.7m, so these liabilities are probably manageable. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. But either way, Johnson Service Group has virtually no net debt, so it's fair to say it does not have a heavy debt load! There's no doubt that we learn most about debt from the balance sheet. 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 want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Over 12 months, Johnson Service Group made a loss at the EBIT level, and saw its revenue drop to UK£215m, which is a fall of 28%. To be frank that doesn't bode well.

Caveat Emptor

Not only did Johnson Service Group's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). Indeed, it lost UK£23m at the EBIT level. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. However, it doesn't help that it burned through UK£9.6m of cash over the last year. So suffice it to say we do consider the stock to be risky. For riskier companies like Johnson Service Group I always like to keep an eye on whether insiders are buying or selling. So click here if you want to find out for yourself.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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.

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