Mitie Group (LON:MTO) Could Easily Take On More Debt

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. We note that Mitie Group plc (LON:MTO) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

When Is Debt A Problem?

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. If things get really bad, the lenders can take control of the business. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. 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 Mitie Group

How Much Debt Does Mitie Group Carry?

As you can see below, Mitie Group had UK£156.6m of debt at March 2023, down from UK£178.1m a year prior. However, it does have UK£248.3m in cash offsetting this, leading to net cash of UK£91.7m.

How Healthy Is Mitie Group's Balance Sheet?

We can see from the most recent balance sheet that Mitie Group had liabilities of UK£1.07b falling due within a year, and liabilities of UK£335.9m due beyond that. Offsetting this, it had UK£248.3m in cash and UK£786.8m in receivables that were due within 12 months. So its liabilities total UK£370.6m more than the combination of its cash and short-term receivables.

While this might seem like a lot, it is not so bad since Mitie Group has a market capitalization of UK£1.37b, and so it could probably strengthen its balance sheet by raising capital if it needed to. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. Despite its noteworthy liabilities, Mitie Group boasts net cash, so it's fair to say it does not have a heavy debt load!

On top of that, Mitie Group grew its EBIT by 40% over the last twelve months, and that growth will make it easier to handle its debt. The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine Mitie 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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. While Mitie 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. During the last three years, Mitie Group generated free cash flow amounting to a very robust 91% of its EBIT, more than we'd expect. That puts it in a very strong position to pay down debt.

Summing Up

While Mitie Group does have more liabilities than liquid assets, it also has net cash of UK£91.7m. And it impressed us with free cash flow of UK£58m, being 91% of its EBIT. So we don't think Mitie Group's use of debt is risky. 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 instance, we've identified 1 warning sign for Mitie Group that you should be aware of.

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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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.