Here's Why Staffline Group (LON:STAF) Can Manage Its Debt Responsibly

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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. We note that Staffline Group plc (LON:STAF) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

When Is Debt Dangerous?

Debt assists a business until the business has trouble paying it off, either with new capital or with free 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. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for Staffline Group

What Is Staffline Group's Debt?

You can click the graphic below for the historical numbers, but it shows that Staffline Group had UK£8.30m of debt in June 2021, down from UK£68.5m, one year before. But on the other hand it also has UK£29.2m in cash, leading to a UK£20.9m net cash position.

A Look At Staffline Group's Liabilities

The latest balance sheet data shows that Staffline Group had liabilities of UK£162.7m due within a year, and liabilities of UK£8.20m falling due after that. Offsetting these obligations, it had cash of UK£29.2m as well as receivables valued at UK£118.1m due within 12 months. So it has liabilities totalling UK£23.6m more than its cash and near-term receivables, combined.

Since publicly traded Staffline Group shares are worth a total of UK£128.4m, it seems unlikely that this level of liabilities would be a major threat. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. Despite its noteworthy liabilities, Staffline Group boasts net cash, so it's fair to say it does not have a heavy debt load!

We also note that Staffline Group improved its EBIT from a last year's loss to a positive UK£900k. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Staffline Group can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. Staffline Group may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. Happily for any shareholders, Staffline Group actually produced more free cash flow than EBIT over the last year. There's nothing better than incoming cash when it comes to staying in your lenders' good graces.

Summing up

While Staffline Group does have more liabilities than liquid assets, it also has net cash of UK£20.9m. The cherry on top was that in converted 2,233% of that EBIT to free cash flow, bringing in UK£20m. So we are not troubled with Staffline Group's debt use. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. Case in point: We've spotted 3 warning signs for Staffline Group you should be aware of, and 2 of them are significant.

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.

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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.
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